M ANAGED CARE ORGANIZATIONS M ANAGE TO ESCAPE LIABILITY: WHY ISSUES OF
QUANTITY VS . QUALITY LEAD TO ERISA’S INEQUITABLE PREEMPTION OF CLAIMS
I. INTRODUCTION
Not long ago the notion of managed care was an unfamiliar concept for most
Americans. Today, however, phrases such as “primary care physician,” “health
maintenance organization,” and “provider network” are part of the healthcare vernacular.1
In corporate takeover fashion, the traditional fee-for-service delivery of medicine in the
United States has been dismantled, giving way to imposing health care giants in the shape of
managed care organizations (“MCOs”).2 Marketed as a cost-effective means of delivering
healthcare services, MCOs have revolutionized the medical industry in the form of health
maintenance organizations (“HMOs”), preferred-provider organizations (“PPOs”), and
other variations of networked group health plans.
This paradigm shift to providing cost-effective “corporate” healthcare leads many to
question the price patients pay when third-party review boards determine the scope of their
1
Heather Hutchinson, Note, The Managed Care Plan Accountability Act, 32 IND. L. REV. 1383,
1384 (1999). Managed care is experiencing widespread growth across the United States with
more than 45 million Americans enrolled in managed care organizations [hereinafter MCOs] Id.
at 1385. An escalating number of Americans are affected by MCOs and their administration of
healthcare as more than 70 percent of American workers and their families are covered by
managed care health plans. Id. See also Phyllis C. Borzi, The Evolving Role of ERISA
Preemption and Managed Care: Current Issues of Importance to Employers, Fiduciaries and
Providers, Q286 A.L.I.-A.B.A. 17, 19 (1999) (noting that U.S. Department of Labor statistics
reveal that 72 percent of the workforce, nearly two-thirds of the entire non-elderly population, is
covered under group health plans subject to ERISA).
2
For purposes of this comment, the term “MCOs” refers to group health plans such as health
maintenance organizations (HMOs) or preferred-provider organizations (PPOs), which offer a
wide-range of healthcare services at a fixed price by employing cost-containment mechanisms
such as capitation, utilization reviews, and referral restrictions. See Joan H. Krause, The Role
of the States in Combating Managed Care Fraud and Abuse, 8 ANNALS HEALTH L. 179, n.11
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medical treatment in place of their personal physicians. Issues surrounding medical
accountability and liability have also arisen with the emergence of MCOs, as unwary
patients find themselves without a legal cure for injuries wrought by their health benefit
plans.
In evaluating patients’ potential legal remedies, this Comment explores 1) the
emergence of managed care organizations in the United States; 2) the creation of the
Employee Retirement Income Security Act of 1974 (“ERISA”) and how it impacts
patients’ claims against their MCOs; 3) the question of “quantity” versus “quality” in
evaluating whether ERISA preemption exists; 4) three theories (direct liability, breach of
fiduciary duty, and vicarious liability) used to hold MCOs liable for injuries resulting from
malpractice or the wrongful denial of benefits; 5) state legislative attempts to circumvent
ERISA’s inequitable preemption of claims; and 6) why, given ERISA’s failure to safeguard
employees, new federal legislation is necessary to protect participants in managed care
organizations.
II. THE EMERGENCE OF MANAGED CARE ORGANIZATIONS
A. Traditional Fee-For-Service Healthcare
Until the late 1980s, the concept of managed care was relatively obscure in the United
States.3 The predominant form of healthcare for Americans was the fee-for-service model.4
(1999).
Borzi, supra note 1, at 20 (1999) (“Although some staff model HMOs existed (particularly in California
where Kaiser was popular), the wide variety of managed care organizations available in the marketplace
today, including provider-owned networks, were not in existence or were not readily accessible to most
Americans.”) See also Corrine Parver & Kimberly Alyson Martinez, Holding Decision Makers Liable:
3
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Under this traditional plan, a patient would go to whichever physician she chose, and the
insurance company would pay for the patient’s healthcare services, regardless of the physician
she selected.5 Without influence exerted by the patient’s insurance company, the physician
determined the type and extent of his patient’s treatment, and the insurance company paid him
an amount based upon the physician’s individual fee structure.6
The fee-for-service plan opened itself up for abuse, however, because physicians’
income levels rose in direct proportion with the number of services they provided.7 Critics of
the fee-for-service concept accused physicians of “overtreating” patients by providing
unneeded services and subjecting patients to extraneous tests simply to make more money.8 As
the prevalence of medical malpractice suits grew in the late 1970s and 1980s, the fee-for-
Assessing Liability Under a Managed Health Care System, 51 ADMIN. L. REV. 199, 204 (1999) (noting that
the Kaiser Foundation offered its first health care plans in the mid-1930s, but the rapid expansion of HMOs
did not occur until 1973 when Congress passed the Health Maintenance Organization Act, which permitted
many HMOs to obtain federal grants and loans).
4
See Ryan Steven Johnson, Note, ERISA Doctor in the House? The Duty to Disclose Physician Incentives
to Limit Health Care, 82 MINN. L. REV. 1631, 1635 (1998). See also Jack K. Kilcullen, Groping for the Reins:
ERISA, HMO Malpractice, and Enterprise Liability, 22 AM . J.L. & MED. 7, 15-16 (1996) (noting that until the
1920s, patients paid their physicians directly for medical services rendered, and that private insurance
companies emerged after the Great Depression when the American Hospital Association established
service-benefit plans under which subscribers were reimbursed by a third-party payor for hospital care
costs).
5
Hutchinson, supra note 1, at 1384 (1999). See also Parver supra note 3, at 201-202 (noting third-party
payors’ increasing importance in the 1970s as health insurance companies evolved and began paying
doctors on a “fee-for-service” basis for services rendered).
6
Stephen R. Latham, Regulation of Managed Care Incentive Payments to Physicians, 22 AM . J.L. & MED.
399, 400 (1996). See also E. Haavi Morreim, Redefining Quality by Reassigning Responsibility, 20 AM . J.L.
& MED. 79, 81 (1994) (stating that under the traditional fee-for-service system, physicians were unhindered
by outside influence, and they determined their patients’ needs without considering the costs of those
services). But see Marcia Angell, Cost Containment and the Physician, 254 JAMA 1203, 1205 (1985)
(noting that physicians’ widespread use of unnecessary tests contributed to increasing healthcare costs).
7
Johnson, supra note 4, at 1635. See also Kenneth R. Pedroza, Cutting Fat or Cutting Corners, Health Care
Delivery and Its Respondent Effect on Liability, 38 ARIZ. L.REV. 399, 404 (1996) (noting that healthcare
costs skyrocketed largely because of the fee-for-service reimbursement system, physicians’ practice of
overtreating patients to avoid lawsuits, and the emergence of new technologies in the medical industry).
8
Krause, supra note 2, at 181-82 (discussing physicians’ financial incentives to overtreat their patients in an
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service plan was also criticized for encouraging “defensive” medicine, a practice used to thwart
malpractice lawsuits by providing superfluous medical services.9
B. Making Way for Managed Care
Concerns about physicians “overtreating” patients for profit grew. Amidst widespread
allegations of insurance abuse in fee-for-service medical practices, managed care organizations
moved in, vowing to eradicate high-priced medicine.10 Tired of the astronomical expense of
traditional healthcare plans, employers welcomed MCOs with open arms, eager to believe
promises to reduce the cost of providing health care benefits to their employees.11
Today, according to the U.S. Department of Labor, more than 125 million Americans
rely on more than 2.5 million group health plans for medical coverage.12 With more than 70
percent of the American workforce and their families enrolled in MCOs, issues concerning
patients’ rights and the quality of care received under managed care plans affect the majority of
the U.S. population. 13
attempt to boost their own incomes). See also Jason Mark, HMO Liability: Medical Decisions Made in the
Corporate Boardroom, MASS. LAW. W KLY., June 30, 1997, at B25.
9
Parver, supra note 3, at 202 (noting that critics of the fee-for-service system also accused physicians of
practicing “defensive” medicine, i.e. providing unnecessary medical services to avoid malpractice suits). See
also Pedroza, supra note 7, at 402 n.21 (stating that in the United States defensive medicine may cost $25
billion each year). But see Peter A. Glassman et al., Physicians’ Personal Malpractice Experiences Are Not
Related to Defensive Clinical Practices, 21 J. HEALTH POL. POL’Y & L. 219, 233-34 (1996) (suggesting that
defensive medical practices may not be as common as previously thought).
10
Hutchinson, supra note 1, at 1384. See also Parver, supra note 3, at 202 (“With health care costs
threatening to bankrupt the county, managed care has become a reality.”).
11
See Julie K. Locke, The ERISA Amendment: A Prescription to Sue MCOs for Wrongful Treatment
Decisions, 83 MINN. L. REV. 1027, 1031 & n.21 (1999). By the late 1980s, national medical spending
accounted for nearly 12 percent of the Gross National Product, totaling $604 billion. See also Krause, supra
note 2, at 181 (stating that “[w]hile health care made up only five percent of the Gross National Product in
1950, it reached twelve percent in the early 1990s, and is predicted to grow to fifteen percent by the year
2000.”).
12
Borzi, supra note 1, at 19.
13
Hutchinson, supra note 1, at 1385.
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C. How Managed Care Works
While MCOs may provide employers with less expensive health care benefit plans, the
cost-cutting methods employed by MCOs have garnered tremendous criticism.14 MCOs
reduce costs by limiting who can provide medical services (establishing a provider network); by
monitoring what type of services are available (requiring pre-certification processes, utilization
reviews, and “gag clauses”); and by restructuring how healthcare providers make money
(employing capitation, risk-sharing arrangements, and other incentives for reduced specialist
referrals).15
14
See, e.g., Jane M. Mulcahy, The ERISA Preemption Question: Why Some HMO Members are Dying for
Congress to Amend ERISA, 82 MARQ. L. REV. 877, 898 (1999) (stating that Americans are in favor of
allowing patients to sue HMOs for malpractice because they believe economic incentives created by HMOs
are responsible for decreased patient care); Eleanor D. Kinney, Behind the Veil Where the Action is: Private
Policy Making and American Health Care, 51 ADMIN. L. REV. 145, 156 (1999) (discussing the concern
generated by MCOs because they encourage physicians to limit care); Debra S. Wood, Risky Business:
Lending to Health Maintenance Organizations and Physician Practice Management Companies, 1 N.C.
BANKING INST . 322, 350 (1997) (noting the common perception that HMOs’ cost-containment mechanisms
result in decreased quality of care for HMO patients); Julie A. Martin & Lisa K. Bjerknes, The Legal and
Ethical Implications of Gag Clauses in Physician Contracts, 22 AM . J.L. & MED. 433, 439 (1996) (arguing a
decline in patient care due to HMO-created conflicts between a physician’s desire to treat patients and the
economic incentives offered for limiting treatment); David Orentlicher, Paying Physicians More to Do Less:
Financial Incentives to Limit Care, 30 U. RICH. L. REV. 155, 158-59 (1996) (discussing the limitations MCOs
place on physicians’ abilities to thoroughly treat patients); Susan R. Martyn & Henry J. Bourguignon,
Physician-Assisted Suicide: The Legal Flaws of the Ninth and Second Circuit Decisions, 85 CAL. L. REV.
371, 424 (1997) (studies reveal patients are less satisfied with HMO-provided care than with care provided in
fee-for-service arrangements). But see Maxwell J. Mehlman, Medical Advocates: A Call for a New
Profession, 1 W IDENER L. SYMP . J. 299, 301 (1996) (asserting that patients enrolled in MCOs receive the
same care or better quality care than patients enrolled in fee-for-service programs).
15
As discussed supra at note 2, MCOs in this Comment refer to group health plans which offer a wide-range
of health care services at a fixed price by employing capitation, utilization reviews and specialist referral
restrictions as cost containment mechanisms. The terms HMO and PPO are specific breeds of MCOs, but
there are variations amidst even these species that can be confusing. There are three different HMO models:
the staff model, the independent practice association model (IPA), and the group model. The staff model
includes providers who are salaried employees of the HMO. The IPA model consists of physicians who
contract with an HMO to provide services to the HMO’s members, although IPA physicians may treat other
non-HMO affiliated patients as well. Under the IPA model, the physicians are paid a fee based on the
services rendered or by capitation, a method by which a physician is paid a fixed amount per HMO patient
irrespective of the quantity of services they provide. The group model usually includes a contract between
the employer and a medical group affiliated with the HMO to provide medical services to its employees.
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Under the group model, the medical group receives compensation from the HMO on a capitation basis, i.e. a
fixed amount per plan member regardless of the amount of services the physician provides. It should be
noted that these types of HMOs are not set in stone, and some HMOs have varying characteristics of all
three. In addition to the HMO varieties of MCOs, a PPO is another type of managed care entity. Under the
PPO model, physicians, hospitals, and other healthcare providers join together to provide services to
enrollees who usually pay a premium to the PPO. The PPO, in turn, compensates the health care providers
for the treatment they provide PPO enrollees. Christine E. Brasel, Managed Care Liability: State Legislation
May Arm Angry members with Legal Ammo to Fire at Their MCOs for Cost Containment Tactics…But Could
it Backfire?, 27 CAP. U. L. REV. 449, 451-52 (1999).
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The majority of managed care plans seeking to “manage” healthcare costs begin by
establishing a limited network of providers.16 These MCOs contract with specific doctors and
hospitals to provide healthcare services for plan participants.17 This is the MCO’s first layer of
insulation, as providers are directly responsible for supplying healthcare to plan members as
agreed upon in their contract with the MCO.18 Physicians are not reimbursed for any costs or
services provided above and beyond those expenses authorized by the MCO.19 This tactic
shifts the risk of excess costs and medical services to those providers, thereby furnishing
physicians with a financial incentive to limit treatment to those procedures deemed “strictly
medically necessary.”20
After establishing who may provide medical services, MCOs then limit what types of
healthcare services are covered.21 This next step involves multiple levels of monitoring the
16
Frank Cummings, ERISA Litigation: An Overview of Major Claims and Defenses, SD89 A.L.I.-A.B.A. 1, 53
(1999). An HMO offers plan participants a list of “primary care physicians” from which the enrollee must
select a physician who will provide his or her healthcare services and make all determinations regarding
referrals to other specialists in the plan’s network.
17
Id. In typical employer offered group health plans, the employer pays premiums to an HMO for “coverage”
of employees and their eligible dependents.
18
See Jeffrey E. Shuren, Legal Accountability for Utilization Review in ERISA Health Plans, 77 N.C. L. REV.
731, 739-40 (1999).
19
Krause, supra note 2, at 181. (“The primary cost containment strategy has been to replace providers’
traditional incentives to maximize the volume of services provided with incentives designed to do the
opposite—generally by putting physicians at ‘financial risk’ for the costs of services they provide or
initiate.”).
20
Shuren, supra note 18, at 739-40 & n.92. “Medically necessary” and “medically appropriate” refer to an
MCO’s particular utilization review guidelines and not to what the medical community considers necessary
or appropriate care for that patient. Id. Retrospective utilization review typically makes “medically necessity”
determinations as to whether a proposed treatment is necessary for a medical reason, but not whether the
particular treatment is the most appropriate. Id. Prospective utilization revi ew, on the other hand, usually
determines whether the proposed therapy is both necessary and appropriate. Id. Because prospective
utilization reviews are a key MCO cost-containment technique, they are the type of utilization review focused
on in this comment.
21
Hutchinson, supra note 1, 1386 & n.9 (noting that MCOs are usurping physicians’ determinations
regarding treatment). See also Gregg Easterbrook, Healing the Great Divide: How Come Doctors and
Patients End Up on Opposite Sides?, U.S. NEWS & W ORLD REP., Oct. 13, 1997, at 64. “You can’t do
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treatment that a patient receives. MCOs often require their participants to obtain precertification or pre-authorization before undergoing certain procedures.22 The MCO may then
conduct utilization reviews,23 or external evaluations of medical decisions, to ascertain whether
the proposed treatment is “medically necessary.”24 The end result of these reviews can be
devastating if a MCO determines that a physician’s recommended treatment is unnecessary or
“experimental,” or if these external reviews recommend less expensive treatment and there is
disagreement over whether such treatment would accomplish the same purpose as the
anything anymore without first calling an 800 number where someone with a high-school education asks you
to spell out the diagnosis,” according to Quentin Young, a Chicago physician and president-elect of the
American Public Health Association. Id.
22
Parver, supra note 3, at 205 (noting that whereas retrospective utilization review assesses a claim after
medical treatment has been given, not significantly altering the quality of care a patient receives; prospective
review occurs prior to rendering treatment, and plays a pivotal role in the level of care a patient receives
because treatment is denied until questions of payment are settled). See also Brasel, supra note 15, at 45253 (discussing the departure from past practices where treatment was reviewed after it had been rendered);
and Carla Jensen Hamborg, Medical Utilization: The New Frontier for Medical Malpractice Claims?, 41
DRAKE L. REV. 113, 138 (1992) (stating that the review of proposed treatments before they are administered
plays an important role in the cost containment function of HMOs).
23
Parver, supra note 3, at 205 (stating that utilization reviews refer to “external evaluations that are based on
established clinical criteria and are conducted by third-party payors, purchasers, or health care organizers
to evaluate the appropriateness of an episode, or series of episodes, of medical care.”). Utilization
management entails three principal elements: benefit design, quality control, and health services delivery.
See Susan J. Stayn, Securing Access to Care in Health Maintenance Organizations: Toward a Uniform
Model of Grievance and Appeal Procedures, 94 COLUM . L. REV. 1674, 1679 (1994). By designing a benefits
package that covers only medically necessary care, monitoring the plan’s resources and providers, and
assessing physicians’ performance through a quality assurance program, utilization management controls
costs prospectively. Id. See also Cheralyn E. Schessler, Comment, Liability Implications of Utilization
Review as a Cost Containment Mechanism, 8 J. CONTEMP. HEALTH L. & POL’Y 379, 391 (1992) (noting that
in general utilization review organizations seek to combine quality control and cost containment to create
guidelines for appropriate care while eliminating over utilization of medical services).
24
Mulcahy, supra note 14, at 890-91. Despite the fact that these utilization review procedures often override
a physician’s medical recommendation in an effort to cut costs, these reviews are spun to plan participants
as measures that improve the “quality of care by eliminating medically unnecessary treatment.” Id. See
also Shuren, supra note 18, at 744-45 (discussing how utilization reviews infringe on what was previously the
physician’s sole domain); Parver, supra note 3, at 205-06 (noting that prospective utilization reviews are
divided into pre-admission reviews and concurrent reviews: the standard for reviewing medical treatments
under a pre-admission review is whether the procedure is “medically necessary”; under concurrent reviews
third-party payors are allowed to assess a patient’s progress and evaluate the need for additional treatment
while the patient receives ongoing care).
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physician’s prescribed care.25
In addition to rampant dissatisfaction with the purpose and effect of prospective
utilization reviews, patients and physicians alike also consider “gag clauses” to be among
MCOs’ most offensive limitations on available medical services.26 These provisions restrict a
physician from discussing forms of available treatments with patients until after the MCO has
approved the medical services.27 If a particular course of treatment is not covered under an
MCO plan that employs such “gag clauses,” the physician is forbidden from counseling the
patient on options outside the MCO’s scope of coverage.
After limiting access to specific providers and curtailing the types of medical treatment
available, the final -- and seemingly most effective -- cost-cutting mechanism employed by
MCOs involves fee structures designed to reward physicians for restricting medical services to
25
Brasel, supra note 15, at 453. See also O. Mark Zamora, Medical Malpractice and Health Maintenance
Organizations: Evolving Theories and ERISA’s Impact, 19 NOVA L. REV. 1047, 1055 (1995) (noting
contentious disagreement about what types of treatment MCOs consider as accomplishing the same
purpose); and Mark A. Hall & Gerald F. Anderson, Models of Rationing: Health Insurers’ Assessment of
Medical Necessity, 140 U. PA. L. REV. 1637 (1992) (concluding that courts look at the following three factors
in evaluating “medical necessity”: 1) if a doctor orders the treatment; 2) if the treatment is recognized as
appropriate according to the common custom; and 3) if the treatment is not experimental, educational or
primarily research-oriented).
26
David Trueman, As Managed Care Plans Increase, How can Patients Hold HMOs Liable for Their
Actions?, 71-FEB N.Y. ST . B.J. 6, 27 (1999). In Weiss v. CIGNA Healthcare, Inc., the U.S. District Court
for the Southern District of New York permitted a claim against an HMO alleging breach of fiduciary duty
arising from its “gag order” clause. 972 F. Supp. 748 (S.D. N.Y. 1997). The court ruled that the plaintiff
could proceed on her claim that the gag clause was a breach of the plan’s fiduciary duty, finding that
“CIGNA’s alleged policy of restricting the disclosure of non-covered treatment options would, if true, directly
undermine the ability of plan participants to have unfettered access to all relevant information relating to their
physical or mental condition and treatment options.” The court, however, dismissed plaintiff’s claims for both
breach of fiduciary duty and breach of good faith and fair dealing relating to the allegation that the financial
arrangement pressured physicians to forego medical treatment in order to increase profits. Id.
27
See Trueman, supra note 26, at 27 (discussing the Weiss court’s commentary cautioning that risksharing arrangements are not inherently illegal, and that the HMO’s cost-cutting motive did not make it
inevitable that physicians would undertreat patients to maximize profits).
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“no-frills” health care.28 Through common capitation plans, MCOs pay a physician, or a
practice group, a flat rate for each plan participant regardless of the amount of care or services
provided in a particular month.29 MCOs detach themselves from financial jeopardy even further
by implementing risk-sharing arrangements that allow them to withhold a percentage of the
physician’s monthly capitation payment, pool it with that of other providers, and use it to pay
for specialist referrals, lengthy hospital stays, expensive medical tests or procedures, and other
unanticipated expenses.30 The underlying rationale of these cost-containment efforts is to furnish
providers with economic incentives to act as gatekeepers for the MCOs.31
28
Alison Farber Walsh, Comment, The Attack on Cost Containment: The Expansion of Liability for
Physicians and Managed Care Organizations, 31 J. MARSHALL L. REV. 207, 216-18 (1997). See also Laura
H. Harshbarger, Note, ERISA Preemption Meets the Age of Managed Care: Toward a Comprehensive Social
Policy, 47 SYRACUSE L. REV. 191, 221 (1996) (stating that of 2,000 physicians surveyed, 83.6 percent of
those physicians who are MCO members and 92 percent of those who are not MCO members indicated that
financial incentives diminish the quality of care patients receive). See also Parver, supra note 3, at 206.
Because of the influence exerted by managed care organizations, third-party payors are increasingly paying
physicians and other health-care providers either a set salary, a fixed fee for certain services or a capitation
fee. Id. Utilization reviews are also employed by managed care organizations to keep health care costs
down. Id. These payment mechanisms or utilization review procedures limit a physician’s ability to exercise
independent professional judgment and potentially expose the physician and the paying entity to tort
liability, because these cost-containment procedures diminish the physician’s control over the patient’s
care. Id.
29
See Walsh, supra note 28, at 218 (noting the financial incentive for physicians to limit the amount of
medical services they provide to their patients). See also Vernellia R. Randall, Managed Care, Utilization
Review, and Financial Shift Risking: Compensating Patients for Health Care Cost Containment Injuries, 17
U. PUGET SOUND L. REV. 1, 31-32 (1993) (stating that because capitation forces the provider to shoulder
personal loss, it produces the greatest risk of undertreatment because the provider receives no
reimbursement for providing additional services, but is instead responsible for covering costs in excess of
the capitation fee).
30
Locke, supra note 11, at 1032 & n.25. See also Walsh, supra note 28, at 219-20 (discussing the
“payment incentives” that MCOs use to encourage limiting medical services, especially specialist referrals,
that physicians provide patients); and Randall, supra note 29, at 30 (noting that MCOs induce financial risk
shifting through an assortment of arrangements such as ownership interest, joint venture, bonus
arrangements, rewards, penalties, or a combination thereof).
31
Randall, supra note 29, at 31-32 (concluding that providers will offer services to patients in accordance
with payer guidelines or else risk incurring financial losses). See also Parver, supra note 3, at 206-07 (noting
that when a doctor’s judgment regarding appropriate medical treatment is artificially controlled by a third
party, such as an MCO, by means of cost-containment procedures it is patently unfair to hold only the
doctor liable).
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III. ERISA PREVENTS PLAINTIFFS FROM RECOVERING AGAINST MCOS
A. ERISA’s Noble Purpose
Generally, patients injured by medical malpractice can sue their doctors, hospitals, or
other alleged wrongdoers under state law. 32 But a person’s lawsuit will be barred if the
individual’s malpractice claim depends upon the terms of a health benefit plan that is covered by
the Employee Retirement Income Security Act of 1974 (“ERISA”).33 Congress originally
enacted ERISA as a protective measure for American workers.34 Although primarily intended
to safeguard workers’ pension plan assets from corporate and union misappropriation, the
legislative provisions encompassed all employer-sponsored health benefit plans, except where
the employer is a government or church entity.35
32
Armond Budish, You and the Law: Do You Have the Right to Take an HMO to Court?, THE PLAIN DEALER,
October 24, 1999, at K8.
33
29 U.S.C.S. § 1001 (1994). See also Budish, supra note 32, at K8 (noting that ERISA was adopted to
provide a uniform set of rules to govern employee benefit plans, including health plans. “To avoid a patchwork
of state regulations, ERISA supersedes all state laws and bars lawsuits that relate to employee benefit
plans.”) “Patients enrolled in ERISA-regulated MCOs have no remedy and no adequate right of recourse
when their MCOs negligently provide care, because ERISA preempts the patients’ causes of action. ERISA
enrollees can only recover the value of the benefit denied, an inadequate remedy for a patient who has been
seriously injured or has died due to the negligence of an MCO.” Parver, supra note 3, at 207.
34
Budish, supra note 32, at K8 (stating that “ERISA allows lawsuits ‘to recover benefits’ or to ‘enforce rights
under the terms of the plan.’ But recovering benefits is very different from recovering damages for medical
malpractice.”). See also Blaine Hummel, The Duty of Ordinary Care for HMOs: Can Texas Senate Bill 386
Weather the Storm of ERISA Preemption?, 18 REV. LITIG. 649, 651 (1999). Discussion of the rapid growth
of employee benefit plans that prompted the legislative enactment. ERISA’s purpose was “to protect
interstate commerce and the interests of participants and beneficiaries of financial and other information with
respect thereto, by establishing standards of conduct, responsibility, and obligation for fiduciaries of
employee benefit plans, and by providing for appropriate remedies, sanctions, and ready access to Federal
Courts.” Id.
35
29 U.S.C.S. §§ 1002(1)(3) (1994). An employee welfare benefit plan is defined by ERISA as any plan,
fund, or program established or maintained by an employer or an employee organization for the purpose of
providing “medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident,
disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day
care centers, scholarship funds, or prepaid legal services: to its participants or their beneficiaries. Id.
§1002(1). An employee pension benefit plan is similar to a welfare plan except that the pension plan, fund,
or program “provides retirement income to employees, or results in a deferral of income by employees for
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Intending to establish uniform standards for regulating the administration of benefit
plans, Congress also included a broad preemption clause so that ERISA would supersede
“conflicting or inconsistent state and local regulations.”36 By enacting ERISA, Congress sought
to safeguard employees from unfair benefit plan practices while federally protecting the plans
from inappropriate remedies.37 Rather than living up to its intended protections, however, the
legislation’s inclusive language has had the practical effect of creating loopholes through which
MCOs have largely avoided liability.38
B. The Question of Preemption and the “Relate to” Language in ERISA
For more than two decades, courts have scrutinized the language of ERISA’s
preemption clause.39 Central to the issue of preemption is whether or not a state law “relates to”
an employee benefit plan.40 Until 1995, it appeared well established by the courts that ERISA
periods extending to the termination of covered employment or beyond.” Id. §§ 1002(2)(A). ERISA defines an
“employee benefit plan” as “an employee welfare benefit plan or an employee pension benefit plan or a plan
which is both an employee welfare benefit plan and an employee pension benefit plan.” Id. § 1002(3). See
also Kathy L. Cerminara, Protecting Participants In and Beneficiaries of ERISA-Governed Managed Health
Care Plans, 29 U. MEM . L. REV. 317, 323 (1999).
36
120 Cong. Rec. 29, 197 & 29, 933 (1974) (quoting Senator Williams). See also Mulcahy, supra note 14, at
878-79.
37
Mulcahy, supra note 14, at 878.
38
Trueman, supra note 26, at 7. See also Parver, supra note 3, at 200 & n. 5 (concluding that the ERISA
loophole denies patients injured by the negligent decisions of ERISA-regulated MCOs the right to hold these
MCOs legally accountable for their decisions):
The cost impact of closing the ERISA loophole on insurance premiums is very low.
PricewaterhouseCoopers (PWC) (formerly Coopers & Lybrand) has surveyed the major cost
studies concerning the cost of closing the ERISA loophole. All cost studies, including
those released by the insurance and business lobbies, agree that closing the loophole will
not substantially impact health insurance premiums. PWC determined that the range of
estimates for the health insurance premium costs of litigation for the provision is 0.14 to
1.4%.
Id.
39
Borzi, supra note 1, at 21 (discussing the uncertainty surrounding ERISA preemption).
40
29 U.S.C.S. § 1144(a). The statute states its provisions “shall supersede any and all State laws insofar as
they many now or hereafter relate to any employee benefit plan.” Id. (emphasis added). Section 1003(a)(3)
defines employee benefit plans as “any plan, fund, or program” established or maintained by an employer,
-12-
preemption was expansive, and that any state statute that impacted employee benefit plans,
whether directly or indirectly, would be powerless against its reach.41 Recent U.S. Supreme
Court decisions have chipped away at this wall of judicial precedent, however, and the once
overly broad presumption of ERISA preemption appears to be narrowing. 42
In Blue Cross & Blue Shield Plans v. Travelers Insurance Co., Justice Souter
reformulated the “relate to” analysis of Shaw v. Delta Air Lines, Inc.43 In the Shaw opinion,
an employee organization, or both, to provide participants and beneficiaries with certain specified benefits.
Id. Section 1003(a)(1) defines employee welfare benefit plans as plans in which employers provide: “through
the purchase of insurance or otherwise, … medical, surgical or hospital care or benefits, or benefits in the
event of sickness, accident [or] disability, death, unemployment, or vacation benefits, apprenticeship or
other training programs, or day care centers, scholarship funds, or prepaid legal services . . . .” Id.
41
Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504 (1981). The claim involved employee pension plans
subject to federal regulation under ERISA providing that an employee’s retirement benefits shall be reduced
or offset by an amount equal to any workers’ compensation awards for which the individual was eligible. The
plaintiff brought suit contending that the plans, maintained by the defendants, directly conflicted with the
provisions in the New Jersey Worker’s Compensation Act (NJWCA). The Supreme Court determined that
the state law was preempted under 29 U.S.C. § 1144(a) of ERISA, holding that “even indirect state action
bearing on private pensions may encroach upon the area of exclusive federal concern” and therefore fall
within the “relate to” provision of ERISA. Id. at 525. See also Shaw v. Delta Air Lines, Inc., 463 U.S. 85,
96-97 (1983) (“. . . a state law ‘relates to’ a benefit plan in the normal sense of the phrase, if it has a
connection with or reference to such a plan”); Metropolitan Life Insurance Co. v. Massachusetts, 471 U.S.
724 (1985) (relying on the broad scope of preemption from Shaw and the indirect effect of Alessi to find that
minimum mental-health benefits requirement “related to” plan. State law was, however, saved from
preemption because of ERISA’s insurance savings clause); Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41
(1987) (finding common law tort and contracts causes of action were “related to” employee benefit claim and
therefore preempted. Claim was also distinguished from Metropolitan Life and not exempt under savings
clause); FMC Corporation v. Holliday, 498 U.S. 52 (1990) (finding that state antisubrogation law which
interfered with plan design and calculation of benefit levels “related to” plan and was preempted) IngersollRand v. McClendon, 498 U.S. 133 (1990) (state wrongful discharge claim based on allegation that employer
wrongfully discharged employee to avoid contributions under pension plan was preempted because it
“relates to” a plan).
42
See generally New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514
U.S. 645 (1995); California Division of Labor Standards Enforcement v. Dillingham Construction, N.A., Inc.,
519 U.S. 316 (1997); DeBuono v. NYSA-ILA Medical and Clinical Serv. Fund, 520 U.S. 806 (1997). See also
Borzi, supra note 1, at 22 (“After Travelers, state laws of general application operating in areas of traditional
state regulation that do not single out ERISA plans, nor interfere with their administration, are more likely to
survive preemption challenges. Importantly the Supreme Court has sent out a strong signal that in evaluating
questions of preemption, the necessary analysis involves not only legal principles but factual
determinations.”)
43
See Shaw, 463 U.S. at 96-97 (“. . . a state law ‘relates to’ a benefit plan in the normal sense of the
phrase, if it has a connection with or reference to such a plan”).
-13-
the Court had determined that a state law “relates to” an ERISA-regulated employee benefit
plan “if it has a connection with or reference to such a plan.”44 However, in the unanimous
opinion in Travelers, Justice Souter retained the “reference to” prong from the twelve-year-old
Shaw decision, but he substantially altered the analysis involving the “connection with” prong.45
Justice Souter explicitly narrowed the effect of the Court’s earlier Alessi decision, which found
an ERISA connection where state laws even indirectly affected employee benefit plans.46 In
the Travelers decision, Justice Souter backed away from the previous judicial interpretation,
reasoning that infinite connections would stretch preemption in ways unintended by Congress,
and that such limitless “indeterminacy” could not be the measure of preemption.47
Because a textual analysis of the ERISA statute provides little guidance, as does the
“relate to” provision, the Travelers Court expressed the need to “look instead to the objectives
of the ERISA statute as a guide to the scope of state law that Congress understood would
survive.”48 The Court specifically enumerated as a key ERISA objective the establishment of a
“nationally uniform administration of employee benefit plans,” heralding that goal as the “basic
thrust of the preemption clause.”49
44
Id.
Hummel, supra note 34, at 659 (noting that through its discussion of “reference to” up until the “connection
with” analysis in Travelers, the Court remained faithful to the Shaw analysis of which state laws might “relate
to” an employee benefit plan).
46
Alessi, 451 U.S. at 525 (“even indirect state action bearing on private pensions may encroach upon the
area of exclusive federal concern” and therefore fall within the “relate to” provision of ERISA).
47
Travelers, 514 U.S. at 655 (“[i]f ‘relate to’ were taken to extend to the furthest stretch of its indeterminacy,
then for all practical purposes pre-emption would never run its course, for ‘[r]eally, universally, relations stop
nowhere”). But see Alessi, 451 U.S. at 525 (holding that “even indirect state action bearing on private
pensions may encroach upon the area of exclusive federal concern” and therefore fall within the “relate to”
provision of ERISA).
48
Hummel, supra note 34, at 659-60. See also Travelers, 514 U.S. at 656.
49
Hummel, supra note 34, at 660. See also Travelers, 514 U.S. at 657.
45
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After Travelers, courts determining whether a state law “relates to” an employee
benefit plan must consider a factual analysis that had previously been overlooked during the era
of sweeping judicial interpretations of ERISA’s preemptive power.50 If the state law does not
specifically refer to an employee plan and if it does not impede a “nationally uniform
administration of employee benefit plans,” it may be saved from ERISA preemption.51
C. Statutory Exemptions from Preemption: ERISA’s “Savings” Clause
Like most things in life, ERISA has an exception that “proves” the rule. Although
Congress enacted the legislation to protect all employee benefit plans from state interference,
the “savings” clause of the statute explicitly saves from preemption any state law regulating
insurance, banking, or securities.52 This exception is responsible for the legislative flurry within
states seeking to establish “preemption-proof” insurance laws in response to the current
upheaval over issues of health services and managed care.53
50
Borzi, supra note 1, at 22 (“After Travelers, state laws of general application operating in areas of
traditional state regulation that do not single out ERISA plans, nor interfere with their administration, are
more likely to survive preemption challenges. Importantly the Supreme Court has sent out a strong signal
that in evaluating questions of preemption, the necessary analysis involves not only legal principles but
factual determinations.”).
51
Id. See also Travelers, 514 U.S. at 649-56. The Supreme Court’s analysis of whether a New York statute
imposing surcharges on patients covered by “a commercial insurer but not from patients insured by a Blue
Cross/Blue Shield plan” related to an employee benefit plan found the statute was not preempted by ERISA
because it did not make any specific reference to ERISA plans and because its connection with employee
benefit plans was not such that would disrupt a uniform federally administrated employee benefit plan. Id. at
649-60.
52
29 U.S.C.S. § 1144(b)(2)(A) (“[N]othing in this title shall be construed to exempt or relieve any person from
any law of any State which regulates insurance, banking, or securities.”). See also Metropolitan Life
Insurance Co. v. Massachusetts, 471 U.S. 724 (1985). This was the first case in which the Supreme Court
determined which laws would be considered the type regulating insurance. The state statute in question
required insurers to offer Massachusetts residents, as part of their general insurance policies, minimum
levels of mental health benefits. The Court concluded that the statute escaped preemption by virtue of the
savings clause. Id. at 730-44.
53
Borzi, supra note 1, at 23 (“As states have moved to broaden access to health insurance for the uninsured
and to respond to the consumer backlash against managed care, state insurance regulation, including
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In addition to insurance, banking, and securities laws, the ERISA “savings” provision
also provides statutory exemption for pre-ERISA acts (causes of action which arose prior to
January 1, 1975); generally applicable criminal laws; other laws of the United States (i.e.,
federal laws); the Hawaii Prepaid Health Care Act (under certain circumstances); some state
laws concerning multiple employer welfare arrangements; and qualified domestic relations
orders.54
D. ERISA’s “Deemer” Clause
In order to thwart states’ efforts to statutorily circumvent ERISA’s preemption of state
laws relating to employee benefit plans, Congress included within the legislation a “deemer”
clause.55 Designed to prevent states from disguising their regulation of employee benefit plans as
mere regulation of insurance, this provision states that:
[n]either an employee benefit plan, nor a trust established under such a plan,
shall be deemed to be an insurance company or other insurer, bank, trust,
company, or investment company or to be engaged in the business of insurance
or banking for purposes of any law of any state purporting to regulate
insurance companies, insurance contracts, banks, trust companies, or
investment companies.56
In other words, this ERISA provision prohibits a state law from deeming an employee
activity involving providers and a new generation of risk-bearing entities, has become a lightening rod for legal
challenges based on preemption.”).
54
Id. at 23-24.
55
Id. at 24. See also Pilot Life Insurance Co. v. Dedeaux, 481 U. S. 41 (1987). In this case, the Supreme
Court struck down a state law proving state tort and contracts protections for consumers who had been
subject to unfair claims practices by insurers. In finding that this was not a state law regulating insurance,
the Court distinguished the facts from those in Metropolitan Life Insurance Co. v. Massachusetts, 471 U.S.
724 (1985), by taking a literal reading of the term “regulates insurance.” The Court found that to be a law
regulates insurance it must “not just have an impact on the insurance industry, but must be specifically
directed toward that industry.” The state statute at issue was therefore preempted under ERISA. 481 U.S.
at 50.
56
29 U.S.C.S. § 1144(b)(2)(B).
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benefit plan to be an insurance company by purporting to regulate the business of insurance.57
However, the U.S. Supreme Court has permitted state insurance laws to regulate insured plans,
just not self-insured plans under the “deemer” clause, thereby affording self-insured plans
greater protection from the reach of state laws under ERISA. 58
E. But Does It “Relate to” an ERISA Plan?
Although many individuals are enrolled in managed care organizations as part of their
employer-sponsored health plans, it is important to distinguish the notion of general health plans
from the type of employee benefit plan specifically regulated by ERISA.59 Because only state
laws that “relate to” ERISA plans are preempted, it is important to accurately differentiate
between the employer-sponsored health benefit plan itself and the MCO as a service provider
to the ERISA plan.60 Courts that fail to closely inspect the facts of claims may falsely categorize
state laws regulating MCOs as laws regulating ERISA plans, thereby subjecting the state laws
57
Shuren, supra note 18, at 754 (discussing the restrictions the “deemer” clause places on state law).
Id. See also Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. at 747 (holding that ERISA did not
preempt a Massachusetts statute requiring all group health insurance plans and employee health care plans
to provide certain minimum mental health care benefits, except as the statute pertained to self-insured
health plans).
59
Borzi, supra note 1, at n.2 (discussing the confusion between generic health plans and the term of art
employer-sponsored benefit plans legislated by ERISA):
Despite the similarity of terminology, various types of “health plans” such as health
maintenance organizations, preferred provider organizations, physician sponsored
organizations, and other types of managed care organizations (MCOs) are not “group health
plans” under ERISA, but rather vendors to an employer-sponsored group health plan.
Rather, under ERISA, these entities are commonly referred to as “health insurance
issuers,” a term coined in the Health Insurance Portability and Accountability Act of 1996
(HIPAA), to distinguish them from ERISA-covered employee health benefit plans. HIPAA §
101(a), adding new ERISA §706(b)(2) defines “health insurance issuer” to mean an
insurance company, insurance services, or insurance organization (including a health
maintenance organization) which is licensed to engage in the business of insurance in a
state and which is subject to state law regulating insurance (within the meaning of ERISA
section 514(b)(2)). This term does not include a group health plan.
Id.
58
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to wrongful preemption.61 Prior to preempting state laws, courts must also determine that the
law relates to the employee benefit plan rather than simply to an employee benefit.62
F. The Ramifications of ERISA Preemption
Despite congressional intent to enact ERISA as a sword for aggrieved workers, ERISA
preemption harms individuals by largely shielding MCOs from negligence liability.63 After plan
participants -- or their beneficiaries -- bring state claims against their managed care plans,
MCOs generally argue preemption by asserting that the state law “relates to” them as employee
benefit plans under ERISA.64 MCOs then initiate removal of the state claims to federal court
under the federal question doctrine.65
Plan participants are usually opposed to ERISA preemption because of the statute’s
limited remedies.66 Individuals whose claims have been preempted by ERISA cannot recover
for all of the injuries caused by their MCOs’ refusal of treatment or substandard medical care;
60
Id. at 27-28.
Id. at 28 & n.3 (“In examining a health insurance issuer’s claim to ERISA preemption protection, the court
must examine the facts and circumstances of each case carefully to determine whether the state law is
aimed at regulating the health insurance issuer’s business or in regulating the activities of an ERISA plan.”).
See also American Drug Stores v. Harvard Pilgrim Health Care, Inc., 473 F. Supp. 60 (D.Mass. 1997) and
Washington Physicians Serv. Ass’n. v. Gregoire, 147 F.3d 1039 (9th Cir. 1998), amended on reh’g denied,
No. 97-35536, 1998 WL 525583 (9th Cir. Aug. 24, 1998), and cert. denied, 525 U.S. 1131 (1999).
62
Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987). The Supreme Court found a Maine statute requiring
employers to provide a one-time severance payment to employees after a plant closing was saved from
ERISA preemption because the law regulated the benefit but not the benefit plan. Id. at 6-16.
63
Suzanne Carter, Health Care and ERISA, 36 HARV . J. ON LEGIS. 561, 561 (1999) (noting that current law
generally exempts HMOs from the legal rules of negligence).
64
See supra note 40 for ERISA-governed employee benefit plans.
65
Carter, supra note 63, at 562 & n.10 (“While a claim of federal preemption is not usually sufficient to
furnish removal jurisdiction on a federal court, where federal law has ‘completely preempted’ state law,
removal is proper.”).
66
Mulcahy, supra note 14, at 881. See also Greg Otterson, Comment, Medical Malpractice for Texas
HMOs: The End of a “Charmed Life?”, 39 S. TEX. L. REV. 799, 809-10 (1998).
61
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rather, they may seek only injunctive or declaratory relief provided under ERISA.67 Because
the statutory language in ERISA’s provisions is unclear, courts are split over which forms of
relief Congress intended to include under ERISA’s “equitable” remedies. Five circuits of the
United States Courts of Appeals have held that § 1132 precludes ERISA plaintiffs from
recovering either punitive damages or compensatory damages.68 The practical effect of these
decisions is to deny many plaintiffs a legal cure for the injuries they have suffered.69
In addition to leaving many patients without adequate legal remedies, courts have also
denied a plan participant’s survivors from enforcing a claim if the participant dies as a result of
an MCO’s refusal of treatment or of substandard medical care.70 This judicial determination
that a deceased plan participant’s rights against her MCO are no longer viable after death has
created a system in which ERISA’s “equitable” remedies are anything but equitable.71
G. Well-pleaded Complaints May Escape Preemption
67
29 U.S.C.S. § 1132(a)(3). See also Carter, supra note 63, at 562 (noting that once a judge determines the
state claim to be preempted by ERISA, the plaintiff loses her right to consequential and punitive damages)
(“All that will be recoverable will be the cost of a procedure, no matter how severe a patient’s injury or how
evident her pain and suffering.”).
68
Corcoran v. United HealthCare, Inc., 965 F.2d 1321, 1336 n.18 (5th Cir. 1992) (citing Drinkwater v.
Metropolitan Life Ins. Co., 846 F.2d 821 (1st Cir. 1988), cert. denied 488 U.S. 909 (1988); Harsch v.
Eisenberg, 956 F.2d 651 (7th Cir. 1992), cert. denied 514 U.S. 1051 (1995) and 506 U.S. 818 (1992); Novak
v. Andersen Corp., 962 F.2d 757 (8th Cir. 1992), cert. denied 508 U.S. 959 (1993); Bishop v. Osborn Transp.,
Inc., 838 F.2d 1173 (11th Cir. 1988), cert. denied 488 U.S. 832 (1988); Sokol v. Bernstein, 803 F.2d 532 (9th
Cir. 1986)).
69
Mulcahy, supra note 14, at 881 (noting that if a MCO refuses to cover medically necessary treatment, the
damages will be limited to the cost of that treatment) (“[I]f a woman dies because a mammogram was
refused and her breast cancer was not detected, the damages are limited to $99—or whatever the cost of
the mammogram. The fact that a plaintiff will have no remedy does not affect whether ERISA will supersede
state law.”). See also Cerminara, supra note 35, at 327 (“The lack of substantive regulation in ERISA,
however, permits many plaintiffs . . . to sue only for benefits due rather than for a full range of compensatory
damages. Put simply, some patients lack effective remedy merely because of the source of their health care
benefits.”).
70
Mulcahy, supra note 14, at 883 (stating that a deceased plan participant’s survivors cannot enforce her
rights under the terms of the employee benefit plan).
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A plaintiff bringing a claim against her MCO can avoid immediate preemption under
ERISA by carefully drafting her complaint in accordance with the “well-pleaded complaint
rule.”72 The Supreme Court’s explanation of this rule provides that a civil action will arise under
federal law when a federal question appears on the face of the complaint.73 Because a
defendant cannot automatically convert a state claim into a federal question by asserting a
federal defense, a plaintiff who pleads only state law issues may successfully avoid
preemption.74 An exception to the well-pleaded complaint rule exists, however, in the form of
“complete preemption.”75 If Congress “so completely pre-empts a particular area” such that
any claim invoking it necessarily becomes federal in question, a defendant may convert a
plaintiff’s state claim into a federal question merely by raising the defense.76
The ERISA provision preempting state statutes that “relate to” an employee benefit plan
involves § 1144 and is separate from the “complete preemption” analysis that occurs under §
71
Id. See also Turner v. Fallon Community Health Plan Inc., 953 F. Supp. 419 (D. Mass. 1997), cert. denied
523 U.S. 1072 (1988); and Mertens v. Hewitt Assoc., 508 U.S. 248 (1993).
72
28 U.S.C.S. § 1441(b) (to find that a cause of action arises under federal law, a plaintiff’s well-pleaded
complaint must on its face raise issue of federal law). See also Mulcahy, supra note 14, at 883-84 (“The first
barrier to overcome in successfully avoiding ERISA preemption is meeting the ‘well pleaded complaint
rule.’”).
73
Franchise Tax Bd. of Cal. v. Construction Laborers Vacation Trust for S. Cal., 463 U.S. 1, 9-12 (1983);
Louisville & Nashville R. Co. v. Mottley, 211 U.S. 149, 152 (1908). See also 28 U.S.C. § 1441(b) (only when
an area of law is completely preempted does preemption lead to federal question jurisdiction; on the other
hand, federal preemption that serves only as a defense to a state law claim (often referred to as “conflict
preemption” or “defensive preemption”) does not confer federal question jurisdiction).
74
Mulcahy, supra note 14, at 883.
75
29 U.S.C.S. § 1132 (ERISA’s civil enforcement provision impliedly preempts actions brought in state court
that could have been brought under its provisions). See also Mulcahy, supra note 14, at 884.
76
29 U.S.C.S. § 1132. Two prerequisites to “complete preemption” under ERISA’s civil enforcement
provision are that 1) the plaintiff must be able to bring the action, i.e., the plaintiff must be the participant or
beneficiary of an employee benefit plan; and 2) the claim must come within the scope of that provision, i.e.,
it must be a claim to recover benefits or to enforce rights under the terms of the plan. See also Metropolitan
Life Ins. Co. v. Taylor, 481 U.S. 58, 63-64 (1987) (“Congress may so completely pre-empt a particular area
that any civil complaint raising this select group of claims is necessarily federal in character.”).
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1132.77 For purposes of clarification, if a state law relates to an employee benefit plan, either by
making reference to it or by having a connection with it, the law will be preempted under §
1144 of ERISA. 78 If this “relate to” analysis reveals that preemption is proper, the federal court
is without removal jurisdiction and the state court must resolve the ERISA preemption
dispute.79 Conversely, if the same analysis concludes that the state law does not relate to an
employee benefit plan, then the plaintiff is saved from preemption and she may proceed with her
state law claims.
This is different than if the claim is categorically preempted under § 1132 of ERISA by
way of complete preemption, such as a claim arising under an area that is necessarily federal in
question.80 Claims against MCOs that fit in this § 1132 “complete preemption” category include
77
Rice v. Panchal, 65 F.3d 637, 639 (7th Cir. 1995) amended, reh’g en banc denied sub. nom Rice v. Kanu,
1995 U.S. App. Lexis 31419 (7th Cir. 1995) (concluding that § 1132(a) provides a basis for complete
preemption, whereas § 1144 (a) provides the basis for conflict preemption). The Seventh Circuit summarized
the distinction between conflict and complete preemption as applied under ERISA:
The difference between complete preemption under [§ 1132(a)] and conflict preemption under [§
1144(a)] is important because complete preemption is an exception to the well-pleaded complaint
rule that has jurisdictional consequences. If a state law claim has been “displaced,” and therefore
completely preempted by [§ 1132(a)], then a plaintiff’s state law claim is properly “recharacterized”
as one arising under federal law. But state law claims that are merely subject to “conflict
preemption” under [§ 1144(a)] are not recharacterized as claims arising under federal law; in such
a situation, the federal law serves as a defense to the state law claim, and therefore, under the
well-pleaded complaint rule the state law claims do not confer federal jurisdiction. Thus, complete
preemption under [§ 1132(a)] creates federal question jurisdiction whereas conflict preemption
under [§ 1144(a)] does not.
Id. at 640.
78
Travelers, 514 U.S. at 649-56. The Supreme Court’s analysis of whether a New York statute imposing
surcharges on patients covered by “a commercial insurer but not from patients insured by a Blue Cross/Blue
Shield plan” related to an employee benefit plan found the statute was not preempted by ERISA because it
did not make any specific reference to ERISA plans and because its connection with employee benefit
plans was not such that would disrupt a uniform federally administrated employee benefit plan. Id.
79
Mulcahy, supra note 14, at 885 (stating that this is termed “ERISA preemption.”). See also Schmid v.
Kaiser Found. Health Plan, 963 F. Supp. 942, 944 (D. Or. 1997).
80
Mulcahy, supra note 14, at 886 (discussing the differences between ERISA preemption under § 1144 and
complete preemption under § 1132). See also Metropolitan Life Ins. Co. v. Taylor, 481 U.S. at 66.
-21-
those to recover benefits due or claims enforcing or clarifying a plan participant’s rights.81 Such
claims are completely preempted because they raise a federal question that must be addressed
in federal court.82 A plaintiff is generally disadvantaged by federal jurisdiction under a
completely preempted ERISA claim because of the severely limited remedies available under
the statute.83
IV. THE QUESTION OF QUANTITY VERSUS QUALITY
A. Preemption Under § 1144: A Quantity Versus Quality Determination
It is clear that a claim alleging that a MCO wrongfully failed to authorize treatment is
barred under ERISA’s complete preemption provision (§ 1132), but that does not mean that all
suits against managed care are doomed.84 In evaluating whether claims “relate to” an employee
benefit plan under § 1144 of ERISA, courts are increasingly distinguishing between claims
involving the “quantity” of benefits provided and those concerning the “quality” of care received.
However, this is not a straightforward determination.85 The following review of two claims
81
Id.
Id. See also 28 U.S.C.S. § 1441(b) (to find that a cause of action arises under federal law, a plaintiff’s
well-pleaded complaint must raise issue of federal law on its face).
83
29 U.S.C.S. § 1132(a)(3). See also Carter, supra note 63, at 562 (noting that once a judge determines the
state claim to be preempted by ERISA, the plaintiff loses her right to consequential and punitive damages)
(“All that will be recoverable will be the cost of a procedure, no matter how severe a patient’s injury or how
evident her pain and suffering.”).
84
See Budish, supra note 32, at K8 (noting that courts initially threw out practically all cases against
HMOs, but growing numbers of courts are determining claims with a quantity of care vs. quality of care
analysis).
85
Id. (stating that “Trying to distinguish between quality and quantity of benefits is not easy. Two courts can
look at similar sets of facts and come to different results.”). See also Bauman v. U.S. Healthcare, Inc., 193
F.3d 151 162 (3rd Cir. 1999) (reiterating that the court has “embraced a distinction between claims pertaining
to the quality of the medical benefits provided to a plan participant and claims that the plan participant was
entitled to, but did not receive, a certain quantum of benefits under his or her plan.” The Third Circuit
restated, however, that “[t]here are some cases in which it may be difficult to distinguish between claims
challenging the quality of benefits rather than their quantity”). See also Ouellette v. Christ Hospital, 942
F.Supp. 1160, 1164 (S.D. Ohio 1996) (stating that because the Sixth Circuit has not developed a test to
82
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involving pregnant women demonstrates how, in the absence of a “bright line” Supreme Court
ruling, courts’ blurred interpretations of ERISA can lead to disparate results.
During Linda Visconti’s third trimester of pregnancy, she developed symptoms typical
of preeclampsia.86 Her obstetrician ignored these symptoms, and Ms. Visconti’s fully
developed baby girl was stillborn.87 The Viscontis sued U.S. Healthcare, their HMO, alleging
medical malpractice, and the Third Circuit Court of Appeals held that their claim against their
HMO could proceed in state court, where a viable remedy existed.88
Florence Corcoran’s pregnancy was different than Linda Visconti’s because Ms.
Corcoran’s obstetrician correctly diagnosed hers as a high-risk pregnancy.89 He admitted Ms.
determine when a claim falls within § 1132(a), they would adopt a test used by the Seventh Circuit in
analyzing the preemptive effect of § 301 of the Labor Management Relations Act, which the legislative
history of § 1132(a) expresses an intent to mirror). This case is discussed in depth infra at note 94. In Rice,
65 F.3d at 644, the Seventh Circuit found that “[t]he common thread running through [the] cases [interpreting
§ 301] is that complete preemption is required where a state law claim cannot be resolved without
interpretation of the contract governed by federal law.” Id. The Seventh Circuit concluded that similar
analysis was appropriate under § 1132(a) because the ERISA provision concerns claims to recover benefits
or enforce rights “under the terms of the plan.” Id. Thus, “a suit brought by an ERISA plan participant is an
action to ‘enforce his rights under the term of a plan’ within the scope of [§ 1132(a)] where the claim rests
upon the terms of the plan or the ‘resolution of the [plaintiff’s] state law claim … require[s] construing [the
ERISA plan].’ ” Id. at 644-45 (quoting Lingle v. Norge Div. of Magic Chef, Inc., 486 U.S. 399, 407 (1988)).
86
Dukes v. U.S. Healthcare, Inc., 57 F.3d 350, 353 (3d Cir. 1995), cert. denied 516 U.S. 1009 (1995).
Preeclampsia is a serious disorder that occurs in the second half of pregnancy, in which a woman
experiences high blood pressure, fluid retention, nausea, and headaches. If it is not treated, it can lead to
eclampsia, a serious condition characterized by seizures. The American Medical Association Medical
Glossary, (visited Nov. 15, 1999), <http://www.ama-assn.org/insight/gen_hlth/glossary/index.htm>.
87
Dukes v. U.S. Healthcare, Inc., 848 F.Supp. 39 (E.D. Pa. 1994), rev’d 57 F.3d 350 (3d Cir. 1995).
88
Dukes, 57 F.3d at 360-61 (“plaintiffs’ claims . . . merely attack the quality of benefits they received: The
plaintiffs here simply do not claim that the plan erroneously withheld benefits due.”). The Dukes court held
that § 1132 of ERISA, providing complete preemption of the recovery of benefits due under an employee
benefit plan, is “concerned exclusively with whether or not the benefits due under the plan were actually
provided. The statute simply says nothing about the quality of benefits received.” Id. at 357. In Dukes, the
Third Circuit observed that “patients enjoy the right to be free from medical malpractice regardless of whether
. . . care is provided through an ERISA plan. Id. at 358. The Dukes court also provided as plain dictum a
recognition that in some cases the quality of care may be “so low that the treatment received simply will not
qualify as health care at all. In such a case, it well may be appropriate to conclude that the plan participant
or beneficiary has been denied benefits due under the plan.” Id.
89
Corcoran v. United HealthCare, Inc., 965 F.2d 1321, 1322 (5th Cir. 1992). In this case, Florence Corcoran,
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Corcoran to a hospital and prescribed a course of treatment for her that included complete bed
rest during her final months of pregnancy.90 Despite her doctor’s medical recommendation, Ms.
Corcoran’s HMO, United HealthCare, determined that hospitalization was not necessary and
instead authorized home nursing care for ten hours per day.91 While no nurse was on duty, Ms.
Corcoran’s baby went into distress and died in utero.92 The Corcorans sued their HMO for
wrongful death, but the Fifth Circuit Court of Appeals held that their claim was preempted by
ERISA, leaving the Corcorans without any remedy for the alleged wrongful death of their
baby. 93
a long-time employee of South Central Bell Telephone Company, became pregnant in early 1989. In July,
her obstetrician recommended that she have complete bed rest during the remainder of her pregnancy, but
the benefits were denied. Ms. Corcoran’s physician wrote to the medical consultant for Bell explaining that
she had a “high risk pregnancy,” but the consultant denied disability benefits. Unbeknownst to Ms. Corcoran
or her physician, the consultant solicited a second opinion on her condition from another obstetrician who
suggested that “the company would be at considerable risk denying [Ms. Corcoran’s] doctor’s
recommendation.” Despite this information, the Bell medical consultant did not initiate providing disability
benefits. Id. As Ms. Corcoran neared her delivery date, her physician ordered her hospitalized so that he
could monitor the fetus around the clock. Because Ms. Corcoran was a member of Bell’s Medical
Assistance Plan, a self-funded welfare benefit plan which provides medical benefits to eligible Bell
employees, her doctor sought pre-certification for Ms. Corcoran’s hospital play in accordance with her plan’s
requirements. Despite her doctor’s recommendation, United HealthCare, as administrator for a portion of
Bell’s medical plan pursuant to its agreement with Bell, determined that hospitalization was not necessary.
Id. Instead, United HealthCare authorized ten hours per day of home nursing care. Ms. Corcoran entered
the hospital on October 3, 1989, but because United had not pre-certified her stay, she returned home on
October 12th. On October 25th, during a period of time when no nurse was on duty, the fetus went into
distress and died. Id.
90
Id. at 1322-23.
91
Id. at 1324. In Corcoran, the Fifth Circuit held that, although the conclusion that Ms. Corcoran did not
need to be hospitalized was erroneous “medical advice,” it did so in the context of making a determination
about the availability of benefits under an employee disability plan, and the claim was therefore preempted
under § 1144 of ERISA because it “related to” an employee benefit plan.
92
Id.
93
Corcoran, 965 F.2d at 1338. As its defense, United HealthCare argued that the Corcorans’ cause of action
sought damages for improper handling of a claim from those responsible for simply administering benefits
under an ERISA-governed plan. Id. at 1325. They contended that, because their relationship with Ms.
Corcoran came into existence solely as a result of an ERISA plan, it was defined entirely by the plan. Id.
United HealthCare therefore argued that the Corcorans’ claims “related to” an ERISA plan and was within the
broad scope of state law claims preempted by the statute. Id. The Corcorans argued, however, that their
cause of action should be treated as a state law of general application which involves an exercise of
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The disparate outcomes of these two cases illustrate ERISA’s inequitable preemption
of claims.94 Federal courts have consistently found that the ultimate determination of whether a
claim is completely preempted by ERISA to be revealed by a quantity of benefits versus
quality of benefits analysis.95 Unfortunately, this analysis yields inconsistent results.96
traditional state authority and affects principal ERISA entities in their individual capacities. Id. Furthermore,
they contended that preemption would contravene the purposes of ERISA by leaving them without a remedy.
Id. The Fifth Circuit concluded that, based on the specific facts, United HealthCare’s medical decisions were
incidental to its benefit determinations. Id. at 1331. The court noted that “United makes medical decisions
as part and parcel of its mandate to decide what benefits are available under the Bell plan.” Corcoran, 965
F.2d at 1332. Because the Corcorans were attempting to recover for a tort allegedly committed in the course
of handling a benefit determination, the court held their claim was preempted under ERISA: “Moreover,
allowing the Corcorans’ suit to go forward would contravene Congress’s goals of ‘ensur[ing] that plans and
plan sponsors would be subject to a uniform body of benefit law’ and ‘minimiz[ing] the administrative and
financial burdens of complying with conflicting directives among States or between States and the Federal
Government.’ ” Id.
94
It is important to note, however, that Corcoran was decided before the Supreme Court’s Travelers
decision. Central to the Corcoran decision was an expansive interpretation of ERISA preemption, which was
narrowed somewhat by the Travelers opinion. That is not to say that recent court decisions find the issue of
“quality” versus “quantity” any more precise, as the following cases demonstrate. See, e.g., Ouellette v.
Christ Hospital, 942 F.Supp. 1160 (S.D. Ohio 1996). In this case, Victoria Ouellette had her ovaries
removed, and despite complications that arose following the procedure, she was discharged from the
hospital because her HMO, ChoiceCare, had a policy limiting hospital stays for ovary removal to two days.
Once at home, Ouellette’s condition deteriorated further, so she sued the hospital and ChoiceCare for
medical malpractice by the hospital staff, allegedly caused by the hospital’s financial relationship with the
HMO. ChoiceCare argued that federal law barred the claim because it was a complaint about the number of
days Ouellette was allowed to be in the hospital, i.e. a claim over “quantity” of care. The U.S. District Court
for the Southern District of Ohio rejected their argument and instead determined: “Ms. Ouellette is not
challenging the amount of benefits but the quality of the service she received. She asserts that ChoiceCare
maintains financial incentives with its providers, the effect of which undermines the quality of care provided
by the providers. Such a claim is separate and distinct from a claim for benefits under a plan.” Id. at 1165.
Accordingly, the court held Ouellette’s claim was not completely preempted by ERISA, noting, however,
that whether Ouellette’s claims are ultimately preempted (under § 1144) will be a matter for the state court
to decide. Id. See also Bauman v. U.S. Healthcare, Inc., 193 F.3d 151 (3rd Cir. 1999). In Bauman, the Third
Circuit Court of Appeals similarly distinguished between the roles of an HMO as an insurance company
making administrative decisions and as a health provider actually making medical decisions. Specifically,
Michelle Bauman’s newborn daughter was released from the hospital 24 hours after her birth in 1995. She
died the next day of meningitis. The Baumans sued their HMO, claiming it was negligent in discharging their
daughter too quickly. The court held that their lawsuit was not barred by ERISA because their claim
concerned a “medical determination of the appropriate level of care.” Id. at 163. It was “not a claim that a
certain benefit was requested and denied.” Id. The court concluded that the lawsuit did “not involve an
attempt to recover benefits due” but instead sought “recovery under the quality standard” based on state law.
Id. at 163-64.
95
Mulcahy, supra note 14, at 886. See also Dukes, 57 F.3d at 357 (citing to Travelers to support its
conclusion that Congress intended that the quality of health care benefits remain “a field traditionally
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A “quantity” claim seeks benefits allegedly due to a participant of an ERISA regulated
plan.97 Such benefit recovery claims fall under §1132 of ERISA and are completely
preempted.98 Conversely, claims alleging that the health benefits received were of inferior
“quality” escape complete preemption, at least temporarily. 99 In these situations, because a plan
participant’s complaint is not exclusively federal in nature, it does not implicate § 1132 of
ERISA and thus it is not immediately preempted.100 The claim will remain in state court long
enough for the judge to evaluate whether the state law at issue “relates to” the employee benefit
plan.101 If so, the claim will be preempted under § 1144 of ERISA, and the plaintiff’s available
remedies will be limited to injunctive or declaratory relief.102 If, however, the state law does not
have a “connection with” or a “reference to” an employee benefit plan under the Travelers
occupied by state regulation”).
96
Dukes, 57 F.3d at 357-58 (“We recognize that the distinction between the quantity of benefits due under a
welfare plan and the quality of those benefits will not always be clear . . . .”).
97
Id. at 356-57. The Dukes court determined that plaintiffs’ complaints did not fall within the scope of
ERISA’s civil enforcement scheme because there was nothing raised regarding a failure “to provide benefits
due under the plan.” Id. The plaintiffs did not allege the failure to perform tests arose in any way from a
denial of benefits under the ERISA plan involved, rather the complaints asserted claims regarding the quality
of care received. Id.
98
Mulcahy, supra note 14, at 886.
99
Id. See also Dukes, 57 F.3d at 355-57.
100
Dukes, 57 F.3d at 357 (concluding that nothing in ERISA’s legislative history suggested that quality
claims, as opposed to quantity claims, would be completely preempted).
101
Rice, 65 F.3d at 640 (noting that “state law claims that are merely subject to ‘conflict preemption’ under
[§ 1144(a)] are not recharacterized as claims arising under federal law . . . and therefore, under the wellpleaded complaint rule the state law claims do not confer federal jurisdiction.”).
102
29 U.S.C.S. § 1132(a)(3). See also Carter, supra note 63, at 562 (noting that once a judge determines
the state claim to be preempted by ERISA, the plaintiff loses her right to consequential and punitive
damages) (“All that will be recoverable will be the cost of a procedure, no matter how severe a patient’s
injury or how evident her pain and suffering.”). “[I]f a woman dies because a mammogram was refused and
her breast cancer was not detected, the damages are limited to $99—or whatever the cost of the
mammogram. The fact that a plaintiff will have no remedy does not affect whether ERISA will supersede
state law.” Mulcahy, supra note 14, at 881. “The lack of substantive regulation in ERISA, however, permits
many plaintiffs…to sue only for benefits due rather than for a full range of compensatory damages. Put
simply, some patients lack effective remedy merely because of the source of their health care benefits.”
Cerminara, supra note 35, at 327.
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standard, the claim will escape preemption and will be adjudicated in light of the available state
law remedies.103
Despite the relatively clear distinctions between a “quality” analysis under § 1144 and a
“quantity” analysis under § 1132, courts remain troubled by imprecise definitions of what
actions fall under which category, if and when a claim finally makes its way to state court. What
one court views as a denial of some quantifiable benefit, another court deems to be substandard
care or a “quality” of care question.
V. ALTERNATIVE MEANS OF ACHIEVING MCO ACCOUNTABILITY
A. Direct Liability
The status of direct negligence claims against managed care entities remains unclear
under current law.104 In the wake of the uncertain judicial interpretation of liability, many states,
including Texas, have attempted to use legislation to impose both direct and vicarious liability on
MCOs for injuries sustained in the course of medical treatment; however, the scope of an
MCO’s potential responsibility has not been fully resolved.105 It is clear though that MCO
103
Travelers, 514 U.S. at 649-56. The Supreme Court’s analysis in Travelers determined that a state law
was not related to an employee benefit plan because it did not make any specific reference to ERISA plans
and because its connection with employee benefit plans was not such that would disrupt a uniform federally
administrated employee benefit plan. Id.
104
Claimants alleging direct negligence liability for benefit denials have not fared well under judicial scrutiny.
See Corcoran v. United HealthCare, Inc., 965 F.2d 1321 (5th Cir. 1992); Jass v. Prudential Health Care Plan,
Inc., 88 F.3d 1482 (7th Cir. 1996); Tolton v. American Biodyne, Inc., 48 F.3d 937 (6th Cir. 1995). The Corcoran
case is discussed supra at notes 89-94 and accompanying text. But see In re U.S. Healthcare, Inc., 193
F.3d 151 (3rd Cir. 1999) (succeeding on direct tort and vicarious liability claims due to the quality of benefits
received); Dukes v. U.S. Healthcare, Inc., 57 F.3d 350, 357 (3rd Cir. 1995) (succeeding on a claim for
vicarious liability for medical malpractice due to the quality of benefits received). The Dukes case is
discussed supra at notes 86-88 and accompanying text.
105
TEX. CIV. PRAC. & REM . CODE ANN. §§ 88.001—002 (West 1998). See also Parver, supra note 3, at 204
(“The legal liability of an HMO for the health care it manages for enrollees depends upon the amount and
level of control exerted by the managed care organizations over providers.”).
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liability is lessened in independent practice association models where the control over physicians
and other healthcare providers is limited.106 In these instances, it is more difficult to establish a
clear agency relationship because of the administrative layers that separate the MCO and the
health care providers.107 Fortunately, however, the judicial trend appears to favor increased
MCO accountability, and courts are currently considering a variety of direct liability claims
against MCOs.108
These claims can take a variety of forms, including negligence in the utilization review
process; breach of contract; negligent selection or supervision of physicians; breach of
warranty; misrepresentation; bad faith; and breach of fiduciary duty.109 Patients bringing
negligence claims against MCOs must establish four elements: 1) the MCO owed a duty to the
patient; 2) the MCO breached that duty; 3) an injury resulted from the breach; and 4) the
106
See supra note 15 for a discussion of the various types of MCOs.
Parver, supra note 3, at 205 (discussing the difficulties of demonstrating an employer-employee
relationship between an HMO and a physician when a patient goes to her doctor’s office for treatment
instead of to the HMO office directly).
108
Id. at 207 (“[C]ourts today are becoming increasingly wary of letting third party payors go entirely ‘scottfree,’ and are devising new techniques to hold payors liable either through traditional agency principles or
more direct routes.”).
109
Id. at 207-08. See, e.g., Wickline v. California, 192 Cal. App.3d 1630 (1986) (holding third-party payor
“legally accountable when medically inappropriate decisions result from defects in the design or
implementation of cost containment mechanisms”); Steineke v. Share Health Plan of Nebraska, 518 N.W.2d
904 (Neb. 1994) (claiming breach of contract based on the HMO’s representations); Harrell v. Total Health
Care Inc., 781 S.W.2d 58 (Mo. 1989) (ultimately rejecting a negligent supervision of physicians claim
because of a state immunity statute); Cirafici v. Goffen, 407 N.E.2d 633 (Ill. App. 1980) (noting that under
some circumstances health care providers could be liable for breach of warranty); McClellan v. Health
Maintenance Org., 604 A.2d 1053 (Pa. Super. 1992) (holding that to establish misrepresentation in an HMO
claim a plaintiff must show “(1) a misrepresentation of past or existing facts; (2) utterances that were
fraudulent; (3) an intent to induce detrimental reliance; [and] (4) damages proximately caused by the
fraudulent conduct”); Hughes v. Blue Cross of Northern California, 215 Cal. App.3d 832 (1989) (addressing
an alleged breach of implied covenant of good faith and fair dealing for an early hospital release); Weiss v.
Cigna Healthcare, Inc., 972 F. Supp. 748 (S.D.N.Y. 1997) (recognizing a breach of fiduciary duty based on a
“gag order” restricting a plan physician’s ability to discuss treatment options not covered by the plan).
107
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existence of a causal relation between the breach and the injury. 110 In order for a duty to arise,
a person must reasonably foresee that his actions could cause injury to another.111 Critics of
MCO utilization reviews contend that such cost-containment practices trigger foreseeable
injuries when patients are denied medically necessary treatment as a result of prospective
reviews.112 In circumstances where a duty exists, courts must evaluate whether MCOs
breached that duty by falling below the required standard of care.113 Although patients can
easily demonstrate their injuries, it is more difficult to establish the two-step causal connection
required for negligence claims, namely cause-in-fact and proximate cause.114 Once patients
cross this evidentiary threshold, however, and providing ERISA doesn’t preempt the claim,
MCOs have good reason to worry because, when given the chance, juries have awarded
massive monetary damages against the managed care industry.115
110
RESTATEMENT (S ECOND) OF TORTS § 281 (1965). See also Parver, supra note 3, at 208 (discussing the
difficulties that plaintiffs in utilization review negligence claims have in demonstrating the existence of a duty
and the causal relationship between the breach of the duty and injury to the plaintiff).
111
W ILLIAM L. PROSSER ET AL., TORTS 390 (8th ed. 1988).
112
Parver, supra note 3, at 208 (stating that where a patient is denied medically necessary treatment
through a utilization review decision, the injury becomes foreseeable).
113
Id. at 208-209. Case law suggests the existence of two different standards of care: 1) a “procedural
standard” requiring MCOs that conduct utilization reviews to follow a specified procedure to ensure quality
control and prevent undue liability; and 2) a “substantive standard,” similar to a medical standard of care in
malpractice cases, under which utilization review decisions would be evaluated based on the
reasonableness of the course of treatment, given the prevailing medical knowledge and skill commonly held
by health care professionals in good standing.
114
Id. To prove cause-in-fact, a plaintiff must demonstrate that the injury would have been prevented had the
medical treatment not been wrongfully denied. Id. The plaintiff must then prove that the denial of treatment
under utilization review was the proximate cause of the patient’s harm. Id. “Clearly, proving causation
becomes difficult when a patient already has a low chance of survival and experimental treatment options
are the only remaining hope.” Parver, supra note 3, at 208-09.
115
Id. at 211 (noting that insurers and HMOs have grown “increasingly uneasy about liability resulting from
decisions under utilization reviews”). See also Fox v. Healthnet, 1993 WL 794305 (Cal. Super. Ct. 1993). In
this case, after being diagnosed with breast cancer, Mrs. Fox underwent traditional forms of treatment,
including two radical mastectomies and chemotherapy. Because these were not completely effective, Mrs.
Fox’s physicians recommended a bone marrow transplant as her last chance of survival. However, her HMO
denied coverage of the procedure as experimental. The Foxes sued their HMO for breach of contract, breach
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Although the majority of cases against MCOs assert some form of a breach-of-contract
claim, these suits have had limited success because of ERISA preemption. 116 Increasingly,
breach of fiduciary duty claims are taking center stage in direct negligence actions against
MCOs.117 For that reason, and because of their specific ERISA implications, those claims are
discussed separately below.
B. Breach Of Fiduciary Duty
Suits alleging that doctors or health plans breached their fiduciary duties have a good
chance of weathering ERISA preemption challenges in today’s judicial climate.118 As part of
ERISA’s intent to establish the uniform administration of employee benefit plans, the statute
of the covenant of good faith and fair dealing, and intentional infliction of emotional distress, winning a jury
award of $89 million, including $77 million in punitive damages. Distressed over how the verdict would affect
future claims, the HMO settled for an undisclosed amount prior to the entry of final judgment. But see Martin
v. Blue Cross & Blue Shield of Virginia, Inc., 115 F.3d 1201 (4th Cir. 1997) (holding that the defendants
provided sufficient evidence that the proposed treatment was experimental so as to satisfy the substantive
standard of care required to ward off the negligence claim).
116
Parver, supra note 3, at 213. See also Steineke v. Share Health Plan of Nebraska, 518 N.W.2d 904 (Neb.
1994). In Steineke, the plaintiff had an ectopic pregnancy and was seen by a physician outside of Share’s
health network. That non-Share physician scheduled the plaintiff’s necessary surgery with a Share physician
located at the same hospital. The two physicians sought to save plaintiff’s left fallopian tube, which
concerned her because a previous ectopic pregnancy had resulted in the loss of her right fallopian tube. The
plaintiff’s HMO, Share, sought to transfer her to the hospital where her primary care physician was located
even though the patient’s condition worsened and the procedure to save her fallopian tube wasn’t available at
that facility. Although it recognized the potential claim for breach of contract, the court held that the plaintiff
had not sufficiently proven causation.
117
Parver, supra note 3, at 217 (“With increased publicity regarding managed care companies’ imposition of
so-called ‘gag orders,’ courts are beginning to recognize a cause of action based on the insured’s breach of
its fiduciary duty under ERISA for restrictions on the details that participating physicians can give about
treatment options not covered by the HMO.”).
118
Shea v. Esenten, 107 F.3d 625 (8th Cir. 1997) (holding that the widow of a deceased health plan
participant had stated an ERISA claim against her HMO for failing to disclose the terms of a financial
incentive arrangement designed to minimize referrals); Drolet v. Healthsource, Inc., 968 F. Supp. 757
(D.N.H. 1997) (noting that the broad applicability of ERISA’s fiduciary duty provisions, permitting the plaintiff
to proceed on allegations that both her plan administrator and her plan’s coverage provider failed to disclose
material facts regarding physician payment arrangements to plan beneficiaries. But see Weiss v. Cigna
Healthcare, Inc., 972 F. Supp 748, 755 n. 6 (S.D.N.Y. 1997) (declining to follow Shea and Drolet). See
generally Clifford A. Cantor, Fiduciary Liability in Emerging Health Care, 9 DEPAUL BUS . L.J. 189 (1997)
(discussing claims for breach of fiduciary duty).
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includes rules relating to “reporting, disclosure, and fiduciary responsibility.”119 In order for a
patient alleging breach of fiduciary duty to succeed in a suit again her physician and MCO, she
must establish the following elements: 1) that both are plan fiduciaries; 2) that they breached
their fiduciary duties; and 3) that a cognizable injury resulted.120
Congress enacted ERISA with the intent that the statute’s definition of “fiduciary” be
broadly interpreted.121 The statute further mandates that an ERISA-qualifying fiduciary must
perform his duties in accordance with the following standards:
[A] fiduciary shall discharge his duties with respect to a plan solely in the
interest the participants and beneficiaries and—
(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries; and
(ii) defraying reasonable expenses of administering the plan;
(B) with the care, skill, prudence, and diligence under the circumstances then
prevailing that a prudent man acting in a like capacity and familiar with such
matters would use in the conduct of an enterprise of a like character and with
like
119
See Herdrich v. Pegram, 154 F.3d 362, 369 (7th Cir. 1998), reh’g en banc denied, 170 F.3d 683 (7th Cir.
1999), cert granted, 1999 U.S. LEXIS 4742 (September 28, 1999), citing to Ingersoll-Rand Co. v.
McClendon, 498 U.S. 133, 137 (1990).
120
Herdrich, 154 F.3d at 369-370. ERISA defines the term “fiduciary” in 29 U.S.C.S. § 1002(21)(A), which
reads, in relevant part:
Except as otherwise provided in subparagraph (B), a person is a fiduciary with respect to a plan to
the extent (i) he exercises any discretionary authority or discretionary control respecting
management of such plan or exercises any authority of control respecting management of such
plan or exercises any authority of control respecting management or disposition of its assets … or
(iii) he has any discretionary authority or discretionary responsibility in the administration of such
plan.
Id.
121
Herdrich, 154 F.3d at 370. The court cites to a statement by the Chairman of the House Committee on
Education and Labor, 120 Cong. Rec. 3977, 3983 (February 25, 1974) reprinted at, 2 Legislative History of
the Employee Retirement Income Security Act of 1974, at 3293:
The Committee has adopted the view that the definition of fiduciary is of necessity broad . . . . A
fiduciary need not be a person with direct access to the assets of the plan . . . . Conduct alone
may in an appropriate circumstance impose fiduciary obligations. It is the clear intention of the
Committee that any person with a specific duty imposed upon him by this statute be deemed to
be a fiduciary . . . .
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aims . . . .122
Because a doctor would be breaching his fiduciary duty under ERISA by benefiting his
own financial interests, the Seventh Circuit Court of Appeals recently held that patients may
bring suit for breach of fiduciary duty when physicians withhold or delay treatment because they
have a pecuniary stake in limiting the amount of services provided.123 In 1998, the Seventh
Circuit held that doctors who have profit motives in reducing their patients’ access to specialists
or diagnostic testing are in direct conflict with their ERISA-imposed duty to act in the best
interest of their patients.124 Because cost-containment mechanisms are at the very heart of
managed care organizations’ success, this ruling has enormous implications for the healthcare
122
29 U.S.C.S. § 1104(a)(1). See also Herdrich, 154 F.3d at 371 (citing to James F. Forden et al.,
Handbook on ERISA Litigation § 3.03[A], at 3-53 (1994), stating that “[a] fiduciary breaches its duty of care
under section 1104(a)(1)(A) whenever it acts to benefit its own interests.”) (emphasis in original).
123
Herdrich v. Pegram, 154 F.3d 362 (7th Cir. 1998), reh’g en banc denied, 170 F.3d 683 (7th Cir. 1999), cert
granted, 1999 U.S. LEXIS 4742 (September 28, 1999). In Herdrich, a patient complained to her doctor of
abdominal pain. Her doctor discovered an inflamed mass, but allegedly delayed a referral for an ultrasound
test for eight days. While waiting for the test, Cynthia Herdrich’s appendix ruptured, allegedly resulting in
peritonitis (an inflammation of the abdominal wall). Her HMO required Herdrich to go to a hospital 50 miles
from her home for treatment. Herdrich sued her doctor under Illinois’ medical malpractice law and recovered
$35,000 in compensatory damages. Herdrich also alleged that her doctor and health plan had breached their
fiduciary duty under the plan’s structure that awarded bonuses to doctors who limited patient access to
specialists and expensive diagnostic testing. However, a federal district court dismissed the portion of her
suit that, based on ERISA, claimed the HMO had breached its fiduciary duty. The Seventh Circuit reinstated
Herdrich’s fiduciary duty claim however, reversing the district court’s decision. Herdrich’s health plan, Health
Alliance Medical Plans, Inc., appealed the case, and the U.S. Supreme Court granted certiorari in
September of 1999.
In June of 2000, the Supreme Court reversed the Court of Appeals. Pegram v. Herdrich, 120 S.Ct. 2143 (2000).
In its unanimous decision, the Supreme Court ruled that Ms. Herdrich could not sue her HMO for allegedly putting
profits ahead of the quality of medical care provided to her. Id. The Court opined that patients can sue their doctors
for malpractice in state court, but they cannot attack the HMO itself for being too cost-conscious. Id. at Syllabus,¶
(a). According to Justice Souter, the very purpose of an HMO is to hold down costs by “rationing” medical care. Id.
If patients can sue and win damages merely by showing that the HMO’s administrators were driven by a profit
incentive, Justice Souter reasoned it would mean “nothing less than the elimination of the for-profit HMO.” Id.at
Syllabus, ¶ (d). Justice Souter noted that, in 1973, Congress encouraged the formation of HMOs, and that just a year
later, it enacted ERISA to protect the benefits that employees were promised. Cf. id.
124
Id. See also Linda Greenhouse, Managed Care Challenge To Be Heard by High Court, N.Y. TIMES,
September 28, 1999, at A22.
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industry.125
During the fall of 1999, the heated debate grew even more intense when the Supreme
Court granted certiorari in Pegram v. Herdrich to determine if these financial conflicts of
interest are unlawful.126 Although its review of Herdrich provides an opportunity for the
Supreme Court to champion patients’ rights, even if the Court upholds a patient’s right to sue
her physician and MCO for breach of fiduciary duty, the patient will not be awarded big money
damages because of ERISA’s limited remedies, unless the Court drastically rethinks its
interpretation of the statute’s damages provision. 127
C. Vicarious Liability
Some federal courts have held MCOs vicariously liable for a physician’s negligence
under the doctrines of respondeat superior and ostensible agency.128 These legal theories
require a showing that the physician was negligent because a vicarious liability claim is
125
Alissa J. Rubin, Justices to Hear Challenge to HMO Shield: Health Case is One of Several Involving
Responsibility for Injuries to Patients, N.Y. TIMES, September 29, 1999, at A14 (“[Managed Care
Organizations] viewed the lower court’s ruling as potentially harmful to the industry because it could
undermine many plans’ arrangements for controlling costs and providing standard patient care. It is
common, according to health care lawyers, for managed care companies to withhold part of doctors’
salaries and put it into a pool used to give bonuses to physicians who provide the most economical care.”).
126
Id. (“‘We’ve got California passing a bill holding HMOs liable and Congress debating the same kind of
measure. And now the Supreme Court is going to open the question of whether these financial conflicts of
interest violate the letter and spirit of the law and whether patients should have remedies,’ said Jamie Court,
of the Foundation for Taxpayer and Consumer Rights (Santa Monica)”). See also, Budish, supra note 32, at
K8 (noting that the U.S. Supreme Court’s decision to review a case involving claims against an HMO may
clarify the scope of protection for HMOs under ERISA). See supra note 123 for a discussion of the Supreme
Court’s decision in Pegram v. Herdrich.
127
Rubin, supra note 125, at A14 (“However, even if the patient prevails in this case, she is unlikely to win
much in the way of damages. Under [ERISA] . . . the most a patient can receive if wrongly denied care is
the cost of the benefit that was denied. Thus, a woman whose plan refused to pay for a colonoscopy and
who later was diagnosed with colon cancer and had to have her colon removed could recoup only the cost of
the colonoscopy.”).
128
Carter, supra note 63, at 562 (noting that, because of their “expanded decision-making capacity,” medical
malpractice claims against MCOs are rapidly increasing in the United States).
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predicated on the notion that the physician is an agent of the MCO, and the MCO is therefore
liable for his medical malpractice.129 Under the doctrine of respondeat superior, an employer
will be liable for an employee’s negligent acts as long as the employee is acting within the scope
of his employment.130 Similarly, an HMO model that directly employs physicians, nurses, and
other healthcare workers will be liable for its employees’ negligence in treating patients.131
Realizing the detrimental effect of this direct employment relationship, many MCOs quickly
restructured and entered into “independent contractor” relationships with physicians in an
attempt to dodge vicarious liability.132
Tenacious patients and their lawyers have, however, attempted to combat the
“independent contractor” defense by holding MCOs accountable for physicians’ negligence
under the theory of ostensible agency.133 The doctrine of ostensible agency provides that, where
129
Parver, supra note 3, at 218 (noting that establishing a physician’s negligence can be difficult because
often the MCO acted negligently without the physician’s involvement).
130
Carter, supra note 63, at 562. See also Parver, supra note 3, at 220. Under traditional agency principles,
a relationship exists when two factors are present: 1) the agent is subject to the principal’s control with
respect to the work to be performed and the manner of performance; and 2) the agent’s work is performed for
the principal’s benefit or in the principal’s business. Id. Once these elements are established, the principal
(the MCO) has the burden of proving that the agent (the physician) acted outside the scope of his authority
or employment. Id. A principal’s control over an agent is determinative of the agency relationship. Id. The
right to control the methods or the manner of providing health care is indicative of an employment
relationship, whereas the absence of this right indicates an independent contractor relationship. Id. In
evaluating agency claims related to medical professionals, courts traditionally focus on those areas of
medical service that can be supervised and controlled. Id. Because of the prevalence of managed care in
today’s society, the focus should widen to permit inspection into the level of control exerted by MCOs over
the medical judgment of physicians through utilization review restrictions on treatment. Parver, supra note 3,
at 221.
131
Id. at 221. See also supra note 15 for a discussion of various MCO structures.
132
Carter, supra note 63, at 563 (“Under the respondeat superior theory of tort, however, a health care
provider using independent contractors can escape liability. HMOs and hospitals have therefore had an
incentive to hire independent contractors rather than permanent employees.”). See also Jennifer Anderson,
Comment, All True Histories Contain Instruction: Why HMOs Cannot Avoid Malpractice Liability Through
Independent Contracting With Physicians, 29 MCGEORGE L. REV. 323, 333 (1998) (noting the policy reasons
for preventing MCOs from escaping liability via independent contractors).
133
Carter, supra note 63, at 563. See also L. Frank Coan, Jr., Note, You Can’t There From Here—
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an organization represents that a physician is its agent or employee, and causes a patient to rely
on that representation in submitting to care, an organization will be vicariously liable for the
negligence of the purported agent, regardless of the existence of an independent contractor
relationship.134
Travelers opened the door for successful vicarious liability claims that allege inferior
medical care, notwithstanding ERISA. Under the preemption analysis framework provided by
the Travelers Court, “quality” standards of the type embodied in medical malpractice law do
not “relate to” an ERISA plan. Thus, medical malpractice law does not have a “connection
with” an employee benefit plan because such claims neither impose a benefits structure on plans
nor interfere with the uniform administration of plan benefits.135 Furthermore, medical
malpractice law is simply one component of broader negligence tort laws, and it does not
specifically “refer to” any ERISA plan.
Relying upon the holding in Shaw, the Travelers Court determined that such “quality”
issues would have merely an indirect economic influence on a plan’s cost.136 The Court
reasoned that claims accusing MCOs of delivering poor “quality” care do not directly affect the
uniform administration of employee benefits plans, because such claims have only a “tenuous,
remote, or peripheral” connection with employee benefits plans.137 Rather than being
concerned with the structure or substance of an employee benefits plan, a medical malpractice
Questioning the Erosion of ERISA Pre-emption in Medical Malpractice Actions Against HMOs, 30 GA. L.
REV. 1023, 1030-36 (1996).
134
John R. Penhallegon, Emerging Physician and Organization Liabilities Under Managed Health Care, 64
DEF. COUNS . J. 347, 353 (1997) (referring to RESTATEMENT (S ECOND) OF AGENCY § 267 (1958)).
135
Travelers, 514 U.S. at 658-68.
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plaintiff brings suit based on substandard medical care, not the regulation of care specific to any
ERISA health benefits plan.138
VI. STATES MOVE FORWARD WITH LEGISLATION
A. Circumventing ERISA at the State Level
On the state level, Texas was the first to impose both direct and vicarious liability on
MCOs for injuries that patients received as a result of substandard health care.139 Under the
Texas Senate Bill 386 [hereinafter SB 386], health insurance carriers,140 health maintenance
organizations,141 and other managed care entities142 have a “duty to exercise ordinary care when
making health care treatment decisions.”143 Ordinary care is essentially the care that a
reasonable and prudent MCO would offer patients under similar circumstances.144 SB 386
136
Shaw, 463 U.S. at 100 n.21.
Id. at 100 n.21.
138
Lancaster v. Kaiser Found. Health Plan of Mid-Atlantic States, Inc., 958 F. Supp. 1137, 1146 (E.D. Va.
1997) (stating that because “medical malpractice plaintiffs need only show that a deviation from the standard
medical care occurred . . . [not] why it occurred,” vicarious liability claims were not preempted despite
allegations that a HMO’s financial incentives prompted the malpractice at issue).
139
TEX. CIV. PRAC. & REM . CODE ANN. §§ 88.001—002 (West 1998). See also S. 977, 1997-98 Leg., Reg.
Sess. (CAL. 1997); S. 984, 19th Leg. (HAW. 1997); S. 1904, 90th Leg. (ILL . 1997); H.R. 78, 1998 Leg., Reg.
Sess. (MD. 1998); S. 1400, 222d Leg., Reg. Sess. (N.Y. 1999); H.R. 641, 122d Leg. (OHIO 1997); H.R. 677,
122d Leg. (OHIO 1997); H.R. 685, 122d Leg. (1997); S. 100, 182d Leg. (PA. 1997); H.R. 2530, 100th Leg.
(TENN. 1997); S. 2986, 100th Leg. (TENN. 1997); H.R. 2530, 100th Leg. (TENN. 1997) (state legislative
provisions that subject managed care organizations to liability).
140
§ 88.001(6) defining a “health insurance carrier” as “an authorized insurance company that issues policies
of accident and sickness insurance under Section 1, Chapter 397, Acts of the Legislature, 1955 (Articles
3.70-1, Vernon’s Texas Insurance Code).” TEX. CIV. PRAC. & REM . CODE ANN. § 88.001(6) (West 1998).
141
§ 88.001(7) defining “health maintenance organization” as “an organization licensed under the Texas
Health Maintenance Organization Act (Chapter 20A, Vernon’s Texas Insurance Code).” TEX. CIV. PRAC. &
REM . CODE ANN. § 88.001(7) (West 1998).
142
See § 88.001(8) defining a “managed care entity” as one that “delivers, administers, or assumes risk for
health care services with systems or techniques to control or influence the quality, accessibility, utilization,
or costs and prices of such services to a defined enrollee population, but does not include an employer
purchasing coverage or acting on behalf of its employees” or other exceptions. TEX. CIV. PRAC. & REM .
CODE ANN. § 88.001(8) (West 1998).
143
Id. § 88.002(a).
144
See id. § 88.001(10). See also Douglas H. Ustick, Texas: The New Accountability, HEALTH SYSTEMS
137
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extends this duty of ordinary care to MCOs’ “employees, agents, ostensible agents, or other
representatives.”145 “[H]ealth care treatment decisions” are defined under Texas law as
“determination(s) made when medical services are actually provided by the health care plan . . .
decisions which affect the quality of the diagnosis, care, or treatment provided to the plan’s
insureds or enrollees.”146
Under SB 386, patients insured by or enrolled in MCOs may not maintain claims
against such organizations without going through an extensive utilization review process.147 Prior
to initiating cause of action, the patient must give written notice of her claim and submit the claim
to independent review in compliance with the state’s Insurance Code.148 Texas law also
permits courts to mandate independent review, mediation, or other nonbinding alternative
dispute resolution.149
Additionally, the Texas statute establishes several affirmative defenses for MCOs.150 An
MCO cannot be held liable unless it controlled, influenced or participated in the healthcare
treatment decision.151 Furthermore, unless the MCO denied or delayed payment for any
treatment prescribed by the insured’s physician, it cannot be held liable for a patient’s medical
REVIEWS , Nov./Dec. 1997, at 30.
145
TEX. CIV. PRAC. & REM . CODE ANN. § 88.002(b).
146
Id. § 88.001(5) (emphasis added). See also Carol Marie Cropper, In Texas, a Laboratory Test on the
Effects of Suing H.M.O.s, N.Y. TIMES, September 13, 1998, at C3 (noting that the Texas law, intended to
remedy cases in which utilization reviewers overruled physicians’ or patients’ requests for treatment).
147
See TEX. CIV. PRAC. & REM . CODE ANN. §§ 88.003(a)(1) (“A person may not maintain a cause of action …
unless the affected insured, enrollee, or the insured’s or enrollee’s representative has exhausted the appeals
and review applicable under the utilization review requirements.”).
148
Id. at § 88.003(a)(2)(A), (B).
149
Id. at § 88.003(d).
150
Hummel, supra note 34, at 661.
151
TEX. CIV. PRAC. & REM . CODE ANN. §§ 88.002(c)(1).
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injuries.152 This provision was designed to focus legislative scrutiny on prospective or current
utilization reviews, not on retrospective reviews regarding payment.153 No defense exists,
however, under the common law corporate practice doctrine.154
The Texas legislation has already been attacked by MCOs challenging the new state
law under ERISA preemption.155 Plaintiffs Corporate Health Insurance Inc., Aetna Health Plans
of North Texas Inc., and Aetna Life Insurance Co., brought suit asserting in a summary
judgment motion that SB 386 “impermissibly interferes with the purpose, structure, and balance
of ERISA, thereby injecting state law into an area exclusively reserved for Congress.”156 The
Texas Department of Insurance filed a motion to dismiss for failure to state a claim, arguing that
the statute simply creates a quality-of-care tort that is within the traditional realm of state tort
law.157
Looking to Travelers for guidance, the Texas court upheld many provisions of SB 386,
including those holding managed care entities liable for substandard healthcare treatment.158
However, the court held that several other provisions were preempted by ERISA, such as the
statute’s independent review process for adverse benefit determinations.159
In its “relate to” analysis under Travelers, the Texas court found little support for
152
Id. at § 88.002(c)(2).
Ustick, supra note 144, at 31.
154
TEX. CIV. PRAC. & REM . CODE ANN. §§ 88.002(h) (denying use of state law prohibiting the practice of
medicine or being licensed to practice medicine as a defense to claims brought under this section or any
other law). See also Hummel, supra note 34, at 662 n.97 (“The corporate practice doctrine permits only
organizations run by physicians to practice medicine and had been interpreted to bar medical malpractice
claims against HMOs because they are not licensed to practice medicine.”).
155
Corporate Health Ins., Inc. v. Texas Dep’t of Ins., 12 F. Supp. 2d 597 (S.D. Tex. 1998).
156
Id. at 603.
157
Id. at 603.
153
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plaintiffs’ claim that the law interfered with the uniform administration of employee benefit plans.
Given that “[t]he historic powers of the State include the regulation of matters of health and
safety,” the court found that the MCOs failed to meet their “considerable burden of overcoming
‘the presumption that Congress did not intend to supplant state law.’”160
Because “the existence of an ERISA plan is not essential to the operation of the Act,”
the court held that SB 386 does not “refer to” an employee benefit plan. 161 The court,
however, held that the legislation had several “connections with” ERISA plans, namely that “the
Act improperly imposes state law liability on ERISA entities, impermissibly mandates the
structure of plan benefits and their administration, unlawfully binds plan administrators to
particular choices, and wrongfully creates an alternate enforcement mechanism.”162
In upholding a patient’s right to sue under SB 386, the court particularly stressed the
legislation’s focus on the quality of benefits a patient receives.163 The court made a key
distinction between a claim for wrongly denying benefits (“quantity”) and a claim alleging the
medical care provided was substandard (“quality”).164 The court noted that “[c]laims
158
Id. at 597.
Id.
160
Corporate Health Ins., Inc., 12 F. Supp. 2d at 611. The court noted that it began with the “assumption
that the historic police powers of the States were not to be superseded by the Federal Act unless that was
the clear and manifest purpose of Congress.” Id.
161
Id. at 614. Relying upon the framework established in Travelers, the court held that because “the Act
imposes a standard of ordinary care directly upon health insurance carriers and health maintenance
organizations when making health care treatment decisions, regardless of whether the commercial coverage
or membership therein is ultimately secured by an ERISA plan,” SB 386 did not make reference to ERISA
plans. Id. at 612.
162
Id. at 614.
163
Id. at 616-17. The court noted that any claim brought under SB 386 “would relate to the quality of benefits
received from a managed care entity when benefits are actually provided, not denied.” Corporate Health
Ins., Inc., 12 F.Supp. 2d at 616-17.
164
Id. at 620.
159
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challenging the quality of a benefit . . . are not preempted by ERISA. Claims based upon a
failure to treat where the failure was a result of a determination that the requested treatment
wasn’t covered by the plan, however, are preempted by ERISA.”165
VII. CONGRESS MUST ACT TO AMEND ERISA
A. A Patients’ Bill of Rights or a Worthless Bill of Goods?
State legislators must consider the fate of SB 386 in Texas when they draft legislation
designed to hold MCOs accountable for life or death decisions. However, Congress, as a
federal body, can create new legislation or amend ERISA without fear of such judicial
limitations. Unfortunately, partisan bickering has stalled the enactment of federal legislation to
resolve ERISA’s inequitable preemption of claims.
Heated debate in the House of Representatives surrounded the passage of a Patients’
Bill of Rights, which, unlike its toothless Senate counterpart, provided patients with a right to
sue their MCOs for malpractice.166 Supporters hoped that a Patients’ Bill of Rights would
amend ERISA, thereby forcing MCOs to take responsibility for their actions while, at the same
time, enabling malpractice victims to recover completely for their injuries.167
In 1999, however, Congress failed to reconcile the House version with its weaker
165
Id. But see Brenda T. Strama & Elizabeth Rogers, Splitting the Baby, TEX. LAW., November 30, 1998, at
17 (arguing the court’s decision effectively killed most of the reforms in SB 386 because utilization reviews –
the most commonly cited form of managed care abuse – continue to be unrestricted and preempted by
ERISA).
166
See H.R. 2723. Sponsored by U.S. Rep. Charlie Norwood, the bill would amend Title I of the Employee
Retirement Income Security Act of 1974, Title XXVII of the Public Health Service Act, and the Internal
Revenue Code of 1986 to protect consumers in managed care plans and other health coverage.
167
Carter, supra note 63, at 570 (noting that a Patients’ Bill of Rights would hold HMOs accountable, contain
legal and medical costs, and allow malpractice victims to be duly compensated).
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counterpart in the Senate.168 Although some view this delay as a sign that the Patients’ Bill of
Rights will “die in committee,” others speculate that managed care reform will be high on the
political agenda when legislators reconvene in January of 2000.169
VIII. CONCLUSION
Tragically, while Congress takes its time in legislating protections for patients in MCOs,
many Americans will die waiting. Even with state legislative efforts in progress to arm patients
with the right to sue their MCOs for medical malpractice, the disparity is still great between
recovery on claims alleging substandard quality of health care and the limited ERISA remedies
for claims alleging the wrongful denial of some quantity of benefits.
ERISA was intended to serve as a legislative sword in the hands of workers battling for
their rights, yet the same statute now makes a mockery of justice by shielding managed care
organizations from liability. Congress must heed the call from its constituents to take action by
enacting effective relief for those who have been injured by their health benefit plans. Only then
can ERISA fully protect those plan participants and beneficiaries it was intended to safeguard.
The current status of claims against MCOs remains unclear as a result of judicial
inconsistencies with respect to available ERISA remedies, as well as imprecise judicial
168
Helen Dewar & Juliet Eilperin, Congress Leaves Behind Much Unfinished Business, AKRON BEACON
JOURNAL, Nov. 21, 1999, at A15 (stating that the 106th Congress’ first year “was notable more for what it did
not do than for what it did,” and noting that legislating protections for patients in health maintenance
organizations is among the pile of unfinished business facing the 106th Congress when it returns in
January).
169
Id. (stating that Congress’ agenda for early 2000 is a daunting one, and that “only the most popular of
initiatives, such as HMO reform, are likely to be approved in the take-no-risks climate of an election year”).
Despite high expectations for its 2000 term, Congress again failed to deliver a “Patient’s Bill of Rights” that
amended ERISA and that offered citizens the protection necessary to sue MCOs. Furthermore, such reform
does not seem imminent, given the political landscape after the 2000 election.
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interpretations of “quantity” versus “quality.” Congressional legislation that amends ERISA or
creates new statutory protections for managed care patients would be the most effective means
of resolving the inequities that plague plaintiffs in MCO litigation.170 When Congress reconvenes
in the new year, managed care reform must be its first priority. Failure to legislate adequate
protections will wreak havoc on millions of American lives throughout the next millennium.
Patricia Mullen Ochmann
170
Corcoran v. United HealthCare, Inc., 965 F.2d 1321, 1338, cert. denied 506 U.S. 1033 (1992) (the Fifth
Circuit found it “troubling” that ERISA compelled it to reach a decision leaving the Corcorans without any
remedy for what may have been a serious mistake). The court noted that:
[C]ost containment features such as the one at issue in this case did not exist when Congress
passed ERISA. While we are confident that the result we have reached is faithful to Congress’s
intent neither to allow state-law causes of action that relate to employee benefit plans nor to
provide beneficiaries in the Corcorans’ position with remedy under ERISA, the world of employee
benefit plans has hardly remained static since 1974. Fundamental changes such as the
widespread institution of utilization review would seem to warrant a reevaluation of ERISA so that it
can continue to serve its noble purpose of safeguarding the interests of employees. Our system,
of course, allocates this task to Congress, not the courts, and we acknowledge our role today by
interpreting ERISA in a manner consistent with the expressed intention of its creators.
Id.
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